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The problem is that very few of the companies involved will be affected by the Bill, because most such
multinational companies are non-UK companies. Let me be frank: we can make our company law regime as rigid as we wish, but it will not matter a jot to most of the companies that hon. Members probably have in mind, and will therefore not go far in helping to further their individual campaigns. Most major multinational companies that are UK-listed already take CSR very seriously and spend considerable amounts of time and money on it. We can all too easily ignore the fact that many publicly listed companies sell themselves on their CSR reputation. Furthermore, increasing numbers of shareholders are realising that they can exert a positive influence on the companies that they ultimately control, and we wish to encourage that. The rise of “green” and “ethical” investment funds operated by most of the major fund managers has made them clearly aware of CSR, and it is now simply bad business for a major PLC to ignore it.
The vast majority of companies affected by the Bill—perhaps 99 per cent.—are small and medium-sized companies. Those companies, which are rarely the target of environmental or social campaigns, already have enough troubles without being asked to jump through a series of statutory hoops. Because the Bill deals with UK companies, it does not have the framework to deal with the issues on which activists have been campaigning. It treats the corner shop in the same way as the multinational. It is the wrong place to be dealing with these issues, important as they may be. That is why we tabled amendment No. 392, which proposes that duties shall be appropriate to the size of the company, and amendment No. 788, which would exclude small and medium-sized companies from the provisions.
Many organisations have taken an active interest in the Bill, and I have met several of them. In Committee, the hon. Member for Bedford stated that a voluntary approach would not work and referred to examples of corporate, social and environmental abuse. He hoped that providing legislation on that would raise the bar for CSR. However, the Bill as drafted will merely provide vague language to govern directors and serve to confuse businesses, particularly small and medium-sized companies. That is why we tabled an amendment that would limit it to larger companies.
That said, we believe that the UK should be the world leader in promoting good CSR. Where UK companies lead, Conservatives believe that other companies will follow. However, the answer to leading the way in CSR is not to impose a heavy regulatory burden on our companies but to encourage investors to take into account a company’s record on CSR and to encourage all the companies in the UK to understand that being socially responsible is in the best interests of the company. Governments certainly have a role to play in this; indeed, we often forget the need to use carrots for best practice as much as threatening the stick of regulation. I have no doubt that CSR will also be moved ahead by market forces. Informed consumers voting with their feet will always be a more effective way of getting companies to take up their CSR responsibility than regulation will ever be.
Sarah McCarthy-Fry (Portsmouth, North) (Lab/Co-op):
Unlike many hon. Members present, I was not fortunate enough to serve on the Standing Committee,
but I should like to speak to new clause 4 and amendment No. 2, tabled by my hon. Friend the Member for Bedford (Patrick Hall) and myself.
Just over a year ago, I tabled an early-day motion, which was signed by more than 220 hon. Members, setting out why company law needed to be modernised for the 21st century. I warmly welcome the Bill, particularly the fact that it clearly states the Government’s position with regard to enlightened shareholder value. That clarity seems to be sadly missing from the Conservatives’ approach; I am sure that that will not go unnoticed.
I tabled the amendments in the hope that we could go a little further. New clause 4 proposes a positive duty for company directors to take responsibility for the impacts and interests of their companies in the round by endeavouring to minimise adverse impacts on the community and the environment, promoting the interests of employees, and maintaining high ethical and business standards. That is merely what we have a right to expect of our companies as responsible members of the global community. Modernising company directors’ duties in that way would give them a clear incentive proactively to consider the impact of their business operations on their employees and suppliers and on the companies and environment they rely on. By empowering directors to take their responsibilities seriously, we would give room for our companies’ huge energy and innovation in terms of delivering unprecedented social and environmental benefits. By making it a clear and positive duty, we would provide an incentive for those directors who do not take their responsibilities seriously to think again.
I am a Labour and Co-operative MP. For the co-operative movement, corporate social responsibility is integral to doing business, and always has been. However, it should not only be the concern of co-operatives and social enterprises. It is in the long-term interests of the economy and of society as a whole—and in the interests of the long-term success of companies themselves—that all businesses operate in a responsible and sustainable way.
I support the efforts that the Government have made to encourage responsible business practices, including through the promotion of business education and best practice in CSR. The Bill, particularly through the codification of directors’ duties, addresses a fundamental premise. Should a company operate only in the interests of its members—its shareholders—or should it have a wider remit and operate in the interests of stakeholders? If we accept that, as I do, how should we manage it—by legislation, regulation or voluntary code? That goes to the heart of the matter. In my view, as I said on Second Reading, it is no longer acceptable for financial profit to be the only motivating factor in doing business. Many businesses already acknowledge a wider responsibility to consider the interests of employees and the impacts on the local community of doing business—the essence of what we say is CSR.
Regrettably, though, despite an increasing number of commitments by companies to a more responsible way of doing business, we have evidence that there are still far too many failures to deliver. As my hon. Friend the Member for Bedford noted, the amendment is
supported by members of the Trade Justice Movement and the Corporate Responsibility Coalition. Like most hon. Members here, I have received an enormous number of postcards, letters and representations on this. Many of these organisations have compiled large bodies of evidence detailing the failure of a purely voluntary approach to CSR. When I spoke back in June on Second Reading, I said that The Times had uncovered allegations that Portuguese children as young as 11 were being paid just $20 a day to make shoes for the clothing chain, Zara. It is therefore with a sense of déjà vu, as well as concern, that I note Channel 4’s recent story alleging that factories in Bangladesh that produce clothing for Tesco have employed children as young as 12. ActionAid has also exposed Tesco for paying poverty wages and failing to observe basic health and safety standards in the use of pesticides.
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Tesco is a market leader—a competitive business that recently announced record profits. Many consider it to be a leader in corporate social responsibility, but it obviously continues to fail to deliver that completely. Tesco is not a lone case. Shell is another successful company, which has been at the forefront of promoting the idea of corporate social responsibility, but the social and environmental problems that its activities in Nigeria have caused first came to the world’s attention in 1995. Christian Aid and Friends of the Earth recently produced reports that show that communities and the environment in the Niger delta suffer because of oil spills, gas flaring and other activities that Shell causes.
Michael Fabricant (Lichfield) (Con): By contrast, will the hon. Lady take the opportunity to praise the work of Waitrose, part of the John Lewis partnership, which has an Africa foundation, which provides wages that are acceptable not only to those who receive them, but to hon. Members of all parties? It also promotes education and training in the countries from which it buys produce.
Sarah McCarthy-Fry: I am more than happy to praise companies that implement corporate social responsibility. I was in Ghana recently and I met representatives of an organisation called the Blue Skies company, which operates the highest standards for its employees, provides a high quality product and looks after the interests of the local community.
The highest profile companies are the most easily monitored by campaigning organisations such as the Trade Justice Movement, Christian Aid and Friends of the Earth, and the media. They, therefore, feel the pressure to improve most keenly. However, thousands of British companies have a multinational impact—far too many for the non-governmental organisations to police, as some suggest as a solution. We need a change in the law and the Bill gives us an opportunity to bring that about.
John McDonnell (Hayes and Harlington) (Lab):
One of the points that companies make is that they want a level playing field. Those that develop good practice do not want others to undercut them and compete by
driving everyone down to the lowest common denominator. The good companies want a level playing field of good practice throughout.
Sarah McCarthy-Fry: I could not agree more. Putting a stronger emphasis on action and encouraging a more active approach by directors is more likely to lead to genuine world improvements and create the level playing field that my hon. Friend mentions.
Mr. Gummer: The hon. Lady and I agree about many things. Why does she believe that the Government turned their backs on the six years of work that companies did to report their actions on such issues? The Government told them that they had to do that but then, on the Chancellor’s whim, the policy was thrown out one night because he thought that he would buy off people who did not like corporate social responsibility.
Sarah McCarthy-Fry: I do not want to pre-empt tomorrow’s discussion on the business review aspect of the Bill, but I believe that the majority of companies would welcome the opportunities in the business review, which will enable them to report their activities.
There must always be a balance between incentive and regulation in the framework in which we expect companies to operate. However, a company does not exist in isolation and its value is much more than its capital and the way in which it uses that. A company must take into account its value, brand and reputation. That will apply increasingly as investors and consumers become more sophisticated about the way in which they get involved.
Mr. Redwood: I have much sympathy with the hon. Lady’s aims and with the idea that good directors should do as the new clause suggests. However, let us take the example of an oil company—hon. Members will be pleased to know that I have nothing to do with oil companies. If the new clause were accepted, would an oil company have to decide that it could not promote the sale of petrol to gas guzzlers and people who use too much fuel and that, to satisfy the provision’s requirements, it would have to consider the environment in the long term and move away from a petrol-based model? Is that what the hon. Lady has in mind?
Sarah McCarthy-Fry: The right hon. Gentleman reads far too much into the new clause. The word “endeavour” is important. Directors would have to endeavour to consider the wider environmental impact and ensure that their actions did not have an adverse impact. However, they would have to examine the wider picture and I do not envisage what the right hon. Gentleman suggested happening.
Jim Cousins: Does my hon. Friend acknowledge that the new clause would require directors to consider “significant adverse impact” on the environment, whereas clause 173 is much weaker and the Opposition amendments are so weak and generalised that they would leave any director in a state of confusion about what he or she was supposed to do?
Sarah McCarthy-Fry: I thank my hon. Friend for that intervention—he raised a point that I should have made. “Significant” is a significant word. The amendments that the Opposition have tabled would significantly weaken the Government’s objective. All that I am asking is that we tweak it a little to make it more positive.
The new clause will not open the door to spurious legal challenges. Our amendments would achieve the right balance between rights and responsibilities. I hope that my right hon. Friend the Minister will consider new clause 4 and its aims seriously, and I look forward to her reply.
David Howarth: I begin with the point that the hon. Member for Huntingdon (Mr. Djanogly) made about whether clause 173 constitutes reform. It is a reform because it is clearly different from the previous law, and it is welcome because it supports the development of corporate social responsibility in a way that will protect directors who believe that such matters are important from litigation, which is far more likely to arise than the possibility that the hon. Gentleman raised.
I want to direct most of my comments to new clause 4 and the amendments that the hon. Member for Huntingdon tabled. As I said in Committee, I have every sympathy with the motives of those who tabled the new clause. It is important to drive forward the debate on corporate social responsibility. Unfortunately, after much thought and having considered the debate in Committee carefully, I remain of the view that clause 173 is a better way forward at this stage.
Clause 173 is better for two main reasons. First, I am still worried about the problem of contradictory duties. The hon. Member for Bedford (Patrick Hall) mentioned that and I believe that the problem remains. Secondly, the new clause raises expectations that it cannot fulfil. There is a risk that it will make matters worse for good directors who want to follow a social responsibility agenda.
Let us consider contradictory duties. The central problem is the requirement in the new clause for directors to
“minimise any... adverse impact... on the community and the environment”.
That is different from clause 173, which simply asks directors to “have regard to” the environment and the community. It is impossible to minimise two things simultaneously when there is a trade-off between them. Let us consider a company that is engaged in inherently polluting activities. The way to minimise pollution and thus the impact on the environment is plainly to close the factory. However, that cannot minimise the impact on the community because of all the jobs that would be lost. That also works the other way around. To minimise the impact on the community, the factory must be run as efficiently as possible, at least as regards cost, but that might well lead to worse environmental circumstances.
Mr. Weir: I am interested in the hon. Gentleman’s comments. Yesterday, we held a debate on a switch to green taxation, which the Liberal Democrats proposed. Surely the point of environmental and green taxation is to ensure that directors
“minimise any significant adverse impact of the company’s operations on the community and the environment”.
It is to change the way in which companies operate and realise the principle of the polluter pays. Is not the hon. Gentleman arguing against the policy that the Liberal Democrats promoted yesterday?
David Howarth: Not at all. The problem is in the word “minimise”, which means to make as little as possible. Green taxes both reduce anti-environmental behaviour and raise money simultaneously, but they do not reduce the activity to zero. The problem is in the trade-off, as opposed to minimising, which is the problem of the clause.
Patrick Hall: Trying to minimise significant adverse impact on the environment is overridden by the primary duty of acting in a way to promote the success of the company. How could one promote the success of the company by closing the company? If one closed such a company, one would not just be minimising but eliminating.
David Howarth: There are often examples, which we have discussed on the Floor of the House, of a company that thinks that the way to maximise profits is to close down one part of its operation. The hon. Gentleman’s point is not therefore an objection. I thought that he was going to say that his new clause uses the words “endeavour to minimise”. I have been thinking about that point over the past few months. Technically, it is possible, I suppose, to endeavour to minimise the adverse impact on both the environment and the community, to fail to do both, but then to argue that one has not breached the duty because one has tried to minimise both but failed. That seems a terrible way to draft a duty of directors—it is saying that if they apparently fail to fulfil that duty, they will be let off, because they only have to try to fulfil it. The better, more positive and encouraging way to do it seems to be as the Government have proposed—to say that the director must “have regard” to both the environment and the impact on the community. I am therefore still worried about the contradictory duties point.
My second objection to new clause 4, which is the reason I prefer the Government’s approach, is that it raises false expectations. We have already heard two very different points of view from the hon. Member for Bedford (Patrick Hall) and the hon. Member for Portsmouth, North (Sarah McCarthy-Fry) with regard to whether the new clause promoted a pluralist view of company law or was sticking to the Government line of enlightened shareholder value. The hon. Gentleman was correct that the new clause does not abandon the Government’s basic stance of enlightened shareholder value. The hon. Lady, perhaps talking directly to the campaign groups, was saying that it was an attempt to move the pluralist view on. It cannot do both.
An underlying problem is what company directors’ duties are under the enlightened shareholder value system. It is important to remind ourselves that as long as that system is in place—and the new clause does not challenge that system—the directors’ duties are to the
company, not to anyone else. The hon. Member for Bedford used that point to reinforce his argument, which I think is correct, that there is not much risk of litigation under the new clause, or under clause 173. Who can sue as the company in such a situation? Normally, the board of directors represents the company, and decides whether to sue. If not the board, in some cases, a majority of shareholders—usually, a super majority of 75 per cent.—can order the company to sue. As he said, rare derivative actions will occasionally occur, which we shall discuss later. The scope for using such derivative actions, however, is limited. More likely, as the hon. Member for Huntingdon mentioned, is action by takeover bidders, or administrators—or liquidators—on behalf of creditors after the company has gone insolvent. Those are the only people likely to be using directors’ duties litigiously. Are those people—institutional investors, commercial creditors and boards of directors—likely to put forward, and implement through litigation, a strategy based on pluralism, which is more concerned with the environment and the community than with the company’s profits? I dare to suggest that they will not enforce those directors’ duties in that direction.
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Finally, there is a danger that new clause 4 works against the interests of existing directors who are concerned with corporate social responsibility. The reason for that is that, in practice, those who are vulnerable to being sued for breach of directors’ duties are not those who act only according to the narrow interests of the company—its profits. Instead, they are those who attempt to look more broadly, taking into account the environment and the wider community of employees. On a takeover or liquidation, there is a danger that those who act for the creditors or new owners will sue the old directors for failing to make enough money, and for taking other interests into account. In a way, that is an answer to the question asked by the right hon. Member for Wokingham (Mr. Redwood). Clause 173 achieves extra protection for directors who have had regard to environmental matters and the community, and puts them in a position where they cannot be sued.
We all have experience of that. The existing law mentions the interests of employees, and there have been examples of directors being sued for taking into account the interests of employees, failing to sell the business to the highest bidder, and instead selling it to a bidder whom they thought would carry on the business to the benefit of employees’ jobs, not asset-strip the company. That is a practical matter, and whereas clause 173 offers extra protection, I fear that the new clause reduces that protection.
Patrick Hall: May I remind the hon. Gentleman that he made the point clearly in Committee that such actions cannot proceed unless the loss can be attributed to failing to fulfil those secondary duties? Does he now feel that that would be possible? He did not seem to be convinced in Committee.
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