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17 Oct 2006 : Column 762

No. 397, line 20, at end insert—

‘(4) The duty to promote the success of the company shall be paramount.’.

No. 398, line 20, at end insert—

‘(4) The Secretary of State must issue a non-statutory set of guidelines concerning the application of this section, which must be updated annually.’.

No. 788, line 20, at end insert—

‘(4) The duties implied by this section shall not apply to small and medium sized companies.’.

Patrick Hall: I am relieved that, at last, we can get on to the matters of substance in which many members of the public are interested, and I should have thought that many hon. Members are concerned about them, too. I hope that we shall do so with some of the tolerance, good humour and dignity that we experienced in Committee but which we did not experience during the debate on the programme motion.

It is a little daunting to open the batting on a 1,264 clause Bill. However, thankfully, I wish to speak only to new clause 4 and amendment No. 2—the consequential amendment tabled by my hon. Friend the Member for Portsmouth, North (Sarah McCarthy-Fry) and me.

The House will be aware that directors’ duties have attracted a great deal of attention outside Parliament and, consequently and quite rightly, were subject to detailed and lengthy scrutiny in Committee. I am given to understand that the public response to the issue has been one of the largest of all time. The office of my right hon. Friend the Minister for Industry and the Regions has been inundated by the cards generated by the Corporate Responsibility Coalition and the Trade Justice Movement. I congratulate those two umbrella organisations on their campaign, and I thank the many members of the public who have flagged up their views, both to the Department and to individual Members of Parliament around the country.

The Minister for Industry and the Regions (Margaret Hodge): My hon. Friend raises issues that are of huge concern to many hundreds of thousands of people outside this House. Does he therefore share my concern that, following an acrimonious debate on the programme motion, only one Conservative Back Bencher has chosen to be present for this debate on one of the Bill’s key issues?

Patrick Hall: That is entirely up to the official Opposition, as my right hon. Friend knows.

I was reflecting on the fact that there is a great deal of interest in these matters outside this place. Therefore, although we should not judge the quality of an issue on the size of the postbag on it, it is right that we recognise the scale of interest and concern and reflect that on the Floor of the House on Report, as we did in Committee.

I therefore reiterate my welcome for the progress that the Government have made—which is widely supported elsewhere—in respect of this first ever statement in statute that company directors, in fulfilling their primary duty to promote the interests

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should have regard to the six factors listed in clause 173 and new clause 4. Those factors include


That is the first ever codification, and placement in statute, of duties around the concept of corporate social responsibility. That is, indeed, progress.

It would be remiss of us, however, not to take this opportunity on Report to seek to ensure that what we end up with is the best outcome—one that is pro-business and at the same time socially and environmentally responsible. New clause 4 follows clause 173 closely, but substitutes “have” with “must endeavour to”. The reason for that is clear. An examination of the “Shorter Oxford English Dictionary” reveals that “endeavour” means


to do something. On the other hand, to have regard to something is to give attention or consideration to it. Whereas “have” is a subjective test—a director can say that he or she has thought about the six secondary duties listed in clause 173 and new clause 4, and may or may not have done more about them—“must endeavour to” is an objective test, requiring some evidence of having sought to abide by those duties before deciding whether it was in the best interests of the company so to do.

Mr. Mike Weir (Angus) (SNP): I agree with the hon. Gentleman. I note that he said that the clause is pro-business. Given the changing environment and the concern about environmental issues in this country, does he agree that good businesses will look to be responsible in any event, because they must move with the times or else they will not survive in the new century?

Patrick Hall: That is an important point, and good businesses do approach such matters in that way. What we are trying to create through the Bill, perhaps as amended, is a level playing field to ensure that they are not disadvantaged for giving emphasis to these important matters.

I emphasise that what I am proposing would not change the current position that the overriding duty is to promote the success of the company, but it places the six duties that articulate the essence of enlightened shareholder value at the heart of company law, which has never been the case before. The measure would thus place those desirable objectives firmly on the agenda. I am not convinced that merely having regard to them would suffice, but we shall see.

Being positive about the duties is a pro-business position that helps to create a level playing field underpinning the good practice to which the hon. Member for Angus (Mr. Weir) referred. There is much good practice around, so why not support it in company law? Good companies already do many of the things listed in clause 173, so if those duties are set
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out in law, and especially if they are strengthened as proposed in new clause 4, it will encourage directors to be proactive, rather than passive, about the long-term impact of their business operations on employees, communities, suppliers and the environment. That would support directors who provide the leadership to take such a route, and why should that not be so? Who would not want it to be so? I suggest that they would be the directors who are irresponsible, short-sighted and too lacking in imagination to see the business case for a more progressive approach.

5.15 pm

Much was made in Committee by several hon. Members who suggested that the position I am advancing would open opportunities for litigation and thus increase insurance costs, and they will be able to make their points today. However, the hon. Member for Cambridge (David Howarth) pointed out several times in Committee that suing a director or a board for not fulfilling all or some of the additional six secondary duties will be limited to few classes of people: the board as a whole, a super-majority of shareholders, liquidators acting on behalf of an insolvent company, and a new board during a takeover. A minority of shareholders could bring a derivative action, although the Bill restricts that option to a very limited number of cases because such action would have to be subject to ratification by the majority of shareholders. However, we should not forget that none of those classes of people could sue for a loss to the company unless they could demonstrate that there was a loss due solely to a breach of one or more of the six duties.

When applying any of the duties that we care to think of—whether they are the six secondary duties listed in clause 173, the other seven outlined as general duties in chapter 2 of part 10, or several in an amazing list of 640 or so duties, the existence of which the hon. Member for Huntingdon (Mr. Djanogly) repeatedly mentioned in Committee—directors are expected to act in good faith, to exercise reasonable care, skill and diligence, and to do what is most likely to promote the success of the company for the benefit of its members as a whole. Suing a company director is difficult enough already, so attacking new clause 4 on the basis that it would make such action more likely is not a credible argument. On the contrary—I accept that this is at the margins—the measure would help to protect directors who took responsible and long-term decisions and strengthen the hand of shareholders who wished to challenge directors who did not do that. The power to challenge such directors would come not from new clause 4 or clause 173, but elsewhere, because it is already well established in law.

Mr. Jonathan Djanogly (Huntingdon) (Con): The hon. Gentleman will appreciate that businesses are worried that if they are to be able to show that they have taken notice of the items, they will have to set up processes, introduce new sorts of board minutes and effectively go through all the individual requirements, which will lead to more box ticking and administration.

Patrick Hall: Several of the objectives, such as looking after the environment and caring about one’s
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employees, are issues that all good companies would have no difficulty in addressing. Those that experience such difficulty should be put in a position in which it is unacceptable for them to continue in such a way. Of course, it will be argued that any demand generates time and bureaucracy, but there must be a balance. Some companies already do what is proposed, as the hon. Gentleman knows, and they do not make arguments about ticking boxes and excess bureaucracy. There will obviously be some consequences if we take that route, but there will be hidden and unrecognised costs if we do not do so.

Mr. John Redwood (Wokingham) (Con): I am keen that companies should do their bit for the environment, but can the hon. Gentleman explain what the provision about the environment adds to the big body of environmental legislation and regulation that companies rightly have to observe at present?

Patrick Hall: Indeed, British companies have to obey British law. The provision would put the obligation at the centre of company law, where it would be firmly on the agenda. It would also apply to the behaviour of British companies in their overseas operations, as British statute law does not.

I want to touch on the criticism that the new clause would lead to conflict between the different duties. That is certainly not the intention of the proposal, nor would that be its effect. The primary duty remains clear; were there any conflict the directors have the means to resolve it in the normal way, as at present. There is no change in the current situation or as it is envisaged in the Bill, so I do not agree with the criticism.

It has been suggested that the new clause represents a pluralist approach to corporate social responsibility. That is absolutely not the case. A pluralist approach would allow the interests of all the company’s stakeholders—its employees, the wider community, local residents and consumers—to be given the same priority as the interests of shareholders. It is true that such a situation is a desired long-term objective of CORE—the Corporate Responsibility Coalition—and others but I accept entirely that the framework advanced by the Government through the Bill is one of enlightened shareholder value. The Bill is not about a pluralist approach, nor is the new clause. It is firmly under the umbrella of enlightened shareholder value, which means that the primary duty of directors is to promote the success of the company. If there is to be suing for loss, only losses to the company will count.

Before I conclude, I want to make some observations about the position of the official Opposition. In the other place, in May, Conservative peers sought to remove all matters pertaining to enlightened shareholder value—an attempt to turn back the clock on the progress that is being made in company law. The word “reactionary” may be appropriate. Their position flies in the face of the new support for corporate social responsibility and compassionate Conservatism offered by the new leader of their party, the right hon. Member for Witney (Mr. Cameron), who has made some welcome and strong comments in support of the enlightened shareholder value perspective, so different positions are on display.

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In Committee, we saw clear evidence of the conflict and difficulties in the Conservative party—Conservatives did not know where to stand or which way to face. Although the hon. Member for Huntingdon did not try to repeat the tactics of his friends in another place, he none the less—courteously and good-naturedly, as always—tried to weaken the Government’s approach, never mind mine. It would seem from the amendments that have been tabled today that he and his colleagues are trying to do the same again.

The hon. Gentleman has described the road to enlightened shareholder value as one of good intention but meaningless platitude, and the six secondary duties listed in what is now clause 173 and in new clause 4 as a statement of fashion. Let me explain what that statement apparently applies to. Is it fashionable to

To describe those issues as the mere trivia of fashion is wrong, although I am happy to allow the hon. Gentleman a chance to explain himself.

Mr. Djanogly: I thank the hon. Gentleman for giving me the opportunity to explain what he has misconstrued. I mentioned that those were objects of fashion and I repeat that statement. I say that not for the reasons that he gave, but because there are some 650 common-law duties, of which these six are part, and the Government have cherry-picked certain duties that they want to put into the Bill. All the duties are equally relevant. I am not saying that the six that the Government have chosen are not relevant; I am saying that they should not be codified.

Patrick Hall: That indicates some of the difficulties that the Conservative party has on this issue. Frankly, to regard all 650 duties—I take the hon. Gentleman’s word for the fact that there are 650—as of equal weight and value is not credible and does not stand up to scrutiny. Looking after one’s employees, and having regard to the local community and the environment are perfectly reasonable issues to give higher priority to. We know that the right hon. Member for Witney adopts a kindly, sunny and progressive stance on these matters. The Conservative party went to the polls last May on the ticket, “Go green, vote blue,” but when it comes to delivery and to contributing to company law through this important Bill, we have seen confusion, weakness and another policy vacuum.

Finally, I know that my right hon. Friend the Minister for Industry and the Regions takes a genuine, sympathetic and detailed interest in these matters. With clause 173, welcome progress is being made. In Committee, she did not accept my argument that “having regard to” is just too passive and that we should take the opportunity, as suggested by new
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clause 4, to protect responsible directors and to encourage a proactive, pro-business approach within the ambit of enlightened shareholder value by asking them to “endeavour” to do their best. I look forward to her response. We are not worlds apart, but what she says on the record is really important.

Mr. Djanogly: I declare my interests as they appear in the Register of Members’ Interests. After seven years of consultation and 10 months of Bill process, involving several thousand amendments—650 of them tabled by the Government in the past week—we near the end of the process on the largest Bill in history. One issue that is directly relevant to every group of amendments to be discussed on Report is the timing of implementation. There is much speculation and there are many rumours going round the City and the law firms on that point. It would be most helpful if the Minister could set out the position when the opportunity arises for her to do so.

I will speak to our amendments Nos. 392 to 398. As the hon. Member for Bedford (Patrick Hall) said, the issue of directors’ duties to promote the success of the company as set out in clause 173 is the area of the Bill that has probably courted the most controversy. I do not believe that the Government really wanted that when they set out with the Bill, but gradually, possibly over seven years of consultation, they have dug themselves into something of a hole on these provisions, from which they are now finding it difficult to extract themselves. We have seen that in the conflicting messages from Ministers since the Committee stage. It was interesting to hear the hon. Gentleman say that we are sending out conflicting messages. I suggest that quite the opposite is the case.

5.30 pm

For example, in an article in the Financial Times of 26 September, the Minister, then at the Labour party conference, was reported as saying that the Government were listening to lobbyists and could still use regulations to increase reporting and behavioural requirements for directors, once the Bill was

On the other hand, the Secretary of State was reported as saying, within 24 hours of the Minister of State’s remarks, that the Government did not intend to introduce any changes on Third Reading. I am therefore slightly confused, not least because, without advising us, the Minister tabled amendments to the provisions on accounts and reports, which we are to discuss tomorrow.

The plot thickens yet more. The Minister needs to advise the House whether there is a secret Labour, or perhaps trade union, agenda, or whether two Department of Trade and Industry Ministers are pulling in different directions. Of course, new clause 4, tabled by Labour Back Benchers, creates a third position. Business expects a clear direction from the Government, but in this respect it is not getting it.

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