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David Howarth:
The example that occurred in practice was precisely an attempt to sue a director for selling a business at less than maximum value. In that
example, a director needs the protection of the new law and is not threatened by it at all. My point was therefore that directors are not threatened by the new law, as the hon. Member for Huntingdon was saying, because the only examples of a loss would be where a company could be said to have made a financial loss as a result of taking into account wider interests. In those circumstances, and only in that direction, directors might be vulnerable to personal actions. That is why I said in Committee that clause 173 was a deregulatory clause that protects directors from actions that might otherwise be brought against them.
A problem with the new clause is that if the hon. Member for Bedford is right that the word “endeavour” makes it harder for directors to fulfil their duty than the words “have regard”, in a way, that reduces directors’ protection, as they will be less likely to be able to argue that they have fulfilled their duties under the law and cannot therefore be sued for what they did. I fear that that is an unintended effect of the new clause as drafted. The Government’s existing proposal, because it might be slightly looser, is in practice more helpful for directors who want to do the right thing
I now turn to the amendments tabled by the hon. Member for Huntingdon. Some are slightly puzzling, and one wonders why they are needed. Amendments Nos. 393 and 394 use subjective words and phrases such as “in good faith” or “relevant”, but that subjectivity is already to be found in clause 173. In fact, the House of Lords changed the original draft to ensure that that subjectivity suffuses the clause as a whole, and one of the arguments about new clause 4 is that it renders part of clause 173 objective rather than subjective. Amendments Nos. 393 and 394 would not add anything to the Bill. They are merely confusing, as they throw into doubt how the start of clause 173 should be read.
Similarly, why is amendment No. 392 needed? It talks about requiring directors to act appropriately for the size of a company, but that is implied in the duty already set out in clause 173, where directors are required to act in the way that they think would promote a company’s success. If amendment No. 392 did serve to reduce the scope of the duty placed on directors, it would also have the unfortunate effect of reducing the scope of the protection to them offered by new clause 4, and so could be said to be objectionable on those grounds.
Amendment No. 395 deals with common-law duties. The hon. Member for Huntingdon has said in the past that there are 640 or 650 of them, but there is some confusion in his approach. I have done some digging and discovered that many are simply examples of duties that are in the Bill, such as the duties not to exceed the powers of the company, or to act in accordance with the company’s constitution, or to act with skill and care, and so on. Other examples are not, in the strict sense, directors’ duties at all, as they are not duties to the company but duties to someone else, as set out in the wider environmental, employment or other law. The company law review team and the Law Commission have put years of work into these matters, and so it would be surprising for them to get the law as badly wrong as the hon. Member for Huntingdon suggests.
Amendment No. 788 worries me a bit, as it proposes that the
“duties implied by this section shall not apply to small and medium sized companies.”
First, I do not know what the word “implied” means in that context. It would usually refer to duties not mentioned elsewhere in the clause, but in this case it must refer to duties that are not mentioned but implied by the clause. I am not at all clear what is meant: if the amendment refers to all the duties in the clause, why does not the hon. Member for Huntingdon want the fundamental duty to promote the success of the company to apply to SMEs? That would make no sense, as that duty must apply to companies of all sizes.
Perhaps the hon. Member for Huntingdon really means that the wider concerns that follow the words “have regard” in clause 173 should apply only to large companies. If so, the amendment would achieve only a reduction in the protection offered to directors of SMEs against the sort of legal action that I described earlier. I think that those directors of SMEs who follow corporate and social responsibility requirements closely are entitled to the same protection as are directors of large companies. Therefore, I do not understand what amendment No. 788 is getting at. It may be more of a symbolic gesture rather than something that the hon. Gentleman really wants to be agreed to.
Finally, amendments Nos. 396 and 397 contradict one another, and both cannot be accepted. Amendment No. 396 states that no duty takes precedence over any other, whereas amendment No. 397 states that the duty to “promote success is paramount.” Duties are either equal or unequal; they cannot be both. I hope that the hon. Member for Huntingdon is able to choose between the two alternatives that he offers.
As it stands, and as all speakers have accepted, clause 173 means that the duty to promote the company’s success is paramount, so there is no need to add what is proposed in amendment No. 397. The fact that amendment No. 396 would throw that priority into doubt is unfortunate, and I hope that the hon. Member for Huntingdon will not press it to a vote.
Jim Cousins: I shall be brief, and I shall start by speaking about the position adopted by my right hon. Friend the Minister. The right hon. Member for Suffolk, Coastal (Mr. Gummer) suggested that the architecture of clause 173 was an attempt to claw back what was lost when my right hon. Friend the Chancellor ditched the operating and financial review. If that is true, one has to say that she has not done too badly. Many who have attempted similar tasks in the past have not ended so well, as the right hon. Gentleman will admit. If, as he contends, my right hon. Friend has got the Government and the Chancellor out of a hole, she has survived to tell the tale. That puts her in a strong position.
The hon. Member for Cambridge (David Howarth) was right to say that instead of trying to codify the 650 or so common-law rights accumulated since limited liability began, my right hon. Friend the Minister has set out some general principles. That effort is not an aggressive intrusion on the rights of directors, but an attempt to protect them. There is already a problem
about the rights of directors and their treatment in the law. For example, the rising liability insurance costs for directors should send a signal to the House that the circumstances that obtain at present need to be set in a proper framework of principle that will protect directors and inform the discharge of their duty.
Mr. Redwood: This has been a very short debate, but is it not clear that the Minister and the hon. Members for Bedford (Patrick Hall) and for Cambridge (David Howarth) have completely different views on how the principles at issue would be construed in a court? So a person like me, who brings an open mind to the matter and wonders whether the proposals would work, is left at a loss. The whole thing is very muddled—and I am left having to say as much in an intervention, as there will not even be time for me to speak in the debate.
Jim Cousins: The right hon. Gentleman deserves credit for trying to think clearly. Shortly, he will have to work out whether he should support his party’s amendments, and I suspect that that will add to his confusion rather than diminish it.
New clause 4 takes the principles set out in clause 173 and tries to make them clearer and more specific. The hon. Member for Cambridge drew attention to that part of the new clause that deals with the impact on the environment, but I believe that it would have precisely the opposite effect from the one that he set out. The new clause is much clearer about how directors should set out to protect the environment and is much to be preferred. Clause 173 makes a rather loose and general reference to the
“impact of the company’s operations on the community and the environment”.
The form of words proposed by my hon. Friend the Member for Bedford (Patrick Hall) is more specific and provides better guidance. Moreover, his criticism of the Conservative amendments was absolutely correct.
I hope that the House will recognise that my right hon. Friend the Minister has taken on a difficult and complex matter, in circumstances that the House will agree were less than desirable from her point of view. She has made an excellent job of it. New clause 4 improves on that, and assists her in the work that she has attempted. I hope that the House will support it.
6.30 pm
Mr. John Gummer (Suffolk, Coastal) (Con): I do not think that producing a measure that is capable of so many different interpretations will solve the problem that has been caused by the Chancellor. I speak as someone who takes a strong view on this matter. I draw hon. Members’ attention to my entry in the Register of Members’ Interests. I advise a large number of companies on the subject of corporate responsibility. I prefer the term “corporate responsibility” to “corporate social responsibility” because the latter limits the coverage that companies ought to have.
I am in favour, in principle, of companies having to present to their shareholders a proper account of their activities that covers not only their financial activities, but those that relate to the wider matters of corporate
responsibility. I am in favour of that happening because it means that each company can talk about itself in its own way and satisfy those who listen to it in their own way. The trouble with the Minister’s proposal is that it is so incomprehensible. Either it means a great deal, as some people say, or it means nothing at all compared with the present legal situation.
New clause 4, similarly, is being interpreted either as a mere tightening up—a bit of an extension involving better wording—or as a dramatic alteration. I find this difficult to deal with because I, too, have read what the campaigners have written about the new clause. Frankly, if what they say is true, what the proposers of new clause 4 have said is not quite as true. Alternatively, if what the proposers of new clause 4 say is true, it does not quite explain some of the real difficulties that many of us—who are on the same side in terms of what we are trying to do—perceive in new clause 4. The hon. Member for Cambridge (David Howarth) rightly made that point earlier.
Hon. Members would be wise not to go along with new clause 4, not on the basis that they take a view one way or the other on corporate responsibility or the mechanisms by which we should get companies to take these matters more seriously, but simply because if companies are being asked to do that, they must be clear about what they are expected to do. They must not be presented with wording that will have to be interpreted by the courts.
One of the problems with the bipartisan approach that we try to take on environmental matters is that we often end up doing nothing. Everyone talks about it and the rhetoric is very good, but in the end nothing is done. The worst thing to do in such circumstances is to produce a measure that the courts are going to have to interpret. That is what worries me about this wording. It has been suggested that we should not be too mean to the Minister about this because everyone else who has tried to do something about it has been sacked. That is not a very good idea, if I may say so. The Minister has moved pretty rapidly from one job to another over the past few years, but that seems to be part of this Government’s mechanism of keeping everyone in perpetual motion lest they begin to understand the issues that they are facing and start to worry about the fact that nothing is being done.
Many of us who are pushing for a climate change Bill believe that we are going to have to do a great deal more, much more precisely and with real regulation that will actually work. If we are going to do that, however, we should not at the same time load people down with vague duties and bits and pieces that the courts will interpret. I would say to the Minister that if the Government are going to introduce the kind of environmental legislation that we desperately need to cut our carbon output and change our carbon footprint, we will have to ask people to do some very tough things. So far, the Government have avoided doing any of that. Instead, they have gone in for a kind of flim-flam. The trouble with this particular flim-flam is that it will have to be interpreted by the courts, and we do not know what the outcome will be. Worse still, decent directors who try to understand this legislation will find themselves at odds with the courts. The Minister has put us in a pretty difficult position already with clause 173. I hope that she will satisfactorily
defend it against new clause 4, on the basis that that is even worse, but I do wish that she would get down to some practical, direct and real environmental legislation so that we would know where we were, rather than presenting us with these measures as part of a propaganda proposition to try to get the Chancellor off the hook.
Mr. Weir: I am pleased to be able to make a short contribution to the debate. I was pleased to hear the hon. Member for Bedford (Patrick Hall) say that his new clause was pro-business. It is important for all of us that our companies should continue to be successful. However, the world is changing and—as the right hon. Member for Suffolk, Coastal (Mr. Gummer) rightly said—we are all now much more concerned about the environment and climate change. Companies are going to have to change along with that.
The hon. Member for Portsmouth, North (Sarah McCarthy-Fry) made the point that there is a philosophical argument involved. To whom does a company owe a responsibility? Is it, as the existing law states, only to its shareholders? Incidentally, those shareholders tend these days to be other big companies or institutional investors, which creates a kind of circle. That is where the idea of enlightened environmental shareholder action begins to fall down. Other big companies control each big company, so unless all of them have an interest in doing something about the environment, I do not think that we would get very far.
To whom does a company owe a duty? Traditionally, it has been purely to its shareholders—but in the changing world in which we live, where we need to tackle climate change, companies must also owe a duty to the wider society, as the right hon. Member for Suffolk, Coastal rightly said. New clause 4 would point directors along the route of thinking about their duties towards the community and the environment.
David Howarth: The hon. Gentleman was talking about a company’s duties. However, he then switched to talking about directors’ duties. This provision is about directors’ duties. Companies may have broad duties under environmental law, but this is about directors’ duties to the company.
Mr. Weir: I am well aware of that, but the directors are the controlling mind of the company. I think that the hon. Gentleman is being a bit nit-picking.
Companies will have to change the way in which they interact with communities and with the general environment. The point was made earlier—by a Conservative Member, I think—that there might be a need to change audit procedures if some of these proposals were to be agreed. I believe that companies will have to change anyway, and that they should be thinking now about how they will change their audit procedures in order to assess the carbon footprint of the company, and to determine how the company impacts on the environment. We had a debate in the House yesterday on the Liberal Democrats’ proposals for green taxation, and I understand that the Conservatives have also been considering proposals for environmental taxes. The logical extension of that is that if we are going down the route of taxing companies on their environmental performance rather
than purely on their income, new procedures will have to be imposed on every company in order to work out its environmental impact. The audit procedures will therefore have to be looked at in any event.
The point was also made about the impact of citizens on companies in relation to green and ethical funds. However, if we are serious about introducing the substantial changes that we need to tackle global warming and environmental change, all companies will need to be green and ethical. We should not be looking at separate funds in that regard. All companies should adopt such policies. The whole point of this exercise is to achieve a level playing field, with all companies operating on the same level and considering seriously their community and environmental responsibilities. That has to be done.
The impact of the provision on smaller companies was discussed. The hon. Member for Huntingdon (Mr. Djanogly) claimed that the provisions would affect everyone from the corner shop to the corporation. It is a long time since I practised law, but in my experience most corner shops are not companies, but sole traders or partnerships. I am trying to remember the exact procedure that he used, but I believe that, in the last Budget, the Chancellor took measures to try make small partnerships and sole traders desist from incorporating to avoid taxation.
Let as look at what is already provided for in clause 173 and consider each subsection in turn. Subsection (a) deals with
“the likely consequences of any decision in the long term”.
Any company that does not consider the long-term consequences of a decision is barking mad, because it will affect the future of the company. However, some businesses might look to short-term profit rather than long-term need, so the provision will make sure that companies consider the consequences of their actions. A small company or sole trader will of course think about the long-term consequence of any action, otherwise they would not have a business.
“the interests of the company’s employees”.
In a small business, the employer is likely to know all the employees, and that is more important. Subsection (c) deals with
“the need to foster the company’s business relationships with suppliers, customers and others”,
but in a small business, the chances are that the employer is the sole buyer in the company. Subsection (d) deals with
“the impact of the company’s operations on the community and the environment”.
A small company’s business operates in the community, so the employer would consider it. Subsection (e) deals with
“the desirability of the company maintaining a reputation for high standards of business conduct”.
That is more important for small businesses than it has ever been. A large, multinational oil company might get away with dubious practices, but a small business in a local community is most unlikely to do so. Subsection (f) deals with
“the need to act fairly as between members of the company.”
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