Small Business, Enterprise and Employment Bill

Written evidence submitted by Institute of Directors (SB 17)

Introduction

1. Thank you for giving the Institute of Directors (IoD) the opportunity to provide further supplementary written evidence about the Small Business, Enterprise and Employment Bill 2014. Issues relating to creating a trusted, transparent and fair business environment for companies in the UK are of considerable interests to the IoD and its membership. We are therefore pleased to present our views in respect of the provisions outlined in this Bill.

About the IoD

2. Founded in 1903, and granted a Royal Charter in 1906, the IoD is an independent, non-party political organisation of around 35,000 individual members. Its aim is to serve, support, represent and set standards for directors to enable them to fulfil their leadership responsibilities in creating wealth for the benefit of business and society as a whole. The membership is drawn from right across the business spectrum. 92% of FTSE 100 companies have IoD members on their boards, but the majority of members, some 70%, comprise directors of small and medium-sized enterprises, ranging from long-established businesses to start-up companies.

Overall response

3. Overall we welcome the main provisions of this bill, in particular those sections of direct relevance to the IoD and its membership, as outlined below. The proposed measures in the above clauses will create a more transparent and open business environment for companies operating in the UK as well as significantly reducing much of the regulatory burden on small companies, many of whom have directors who are members of the IoD.

4. The IoD welcomes the Government’s efforts to promote transparency and trust in the UK business sector. We recognise that good corporate governance is inherently linked to trust and confidence in our capitalist system, and that this trust has been severely tested by the economic problems of the last five years.

5. The bill represents a significant piece of legislation and our one overarching concern relates to the time left during this parliament. We would not wish the key provisions to be lost in the "wash up" or completely forgotten. It’s important both Government and Opposition ensure adequate time is put aside to debate the full nature of this bill.

Access to finance

6. Broadly speaking we welcome these proposals. As the Prime Minister made clear in 2013, many retailers are facing significant problems in respect of respect of late payments. Clause 1 is to be welcomed – it will address existing contractual barriers that make it difficult for small businesses to raise finance using their receivables. Addressing this issue means companies will be able to use "invoice financing," which is in itself a new and exciting form of peer to peer lending with many successful companies operating in the UK.

7. The detail proposed in clause 3 is also to be welcomed. We believe companies should publish their payment practices, with a view to creating a more open and transparent environment. Companies that pay their suppliers late or impose unreasonably long payment terms on them adversely impact 85 per cent of small businesses. However, we would caution on anything that creates additional burdens for companies. The government will consult on this clause later in the year with a view for introducing secondary legislation. We look forward to contributing to this discussion.

8. With respect to clauses 4 and 5, we believe this is a welcome addition and should provide small businesses with more understanding and access to other alternative finance options. Where more data is accessible and more widely shared by banks, a significant barrier will be removed for new lenders and alternative finance providers. However, it will be important that this is properly monitored to ensure lenders are indeed a) providing businesses with alternative financing options, should a small business be rejected for a loan and b) sharing data more widely.

9. In addition to these legislative measures, the government’s feedback statement in May provided for a commitment to strengthening the payment code, of which the IoD is a member. It is not a mandatory code and some bodies, notably the Federation of Small Businesses, have called on government to make it such. The IoD rejects this view. The code does need to become more effective and we agree that the decision to set up an advisory board, of which the IoD is a member, is the right way to look at its effectiveness before deciding on whether to introduce legislation forcing companies to sign up to it.

Regulatory reform

10. Our interest here is in clause’s 13 and 14 respectively, regarding streamlined company registration. Broadly speaking, any attempt to reduce the regulatory burdens on business, specifically making life easier for persons setting up a business in order to fulfil their legal obligations, is to be welcomed.

11. More broadly, it is important that Companies House exploits new ways of reducing the administrative burden on companies, particularly those SMEs that lack in-house secretarial or management resources. A modern digitally-based approach to company registration and administration provides the most effective way forward. Creating an efficient and cost-effective technological platform that facilitates the management and communication of reliable company information is the key challenge for Companies House during the next decade.

Transparency and Trust of companies

12. The IoD welcomes the Government’s efforts to promote transparency and trust in the UK business sector. We recognise that good corporate governance is inherently linked to trust and confidence in our capitalist system, and that this trust has been severely tested by the economic problems of the last five years. We broadly support the idea of a central registry of beneficial ownership. However, it should be recognised that law enforcement authorities already have statutory powers of investigation which they can use to try and identify beneficial ownership. Despite these powers, it is often difficult to prove that a person suspected of benefiting from the shares or company in question is actually the beneficial owner. Consequently, although we think that a registry of beneficial ownership is a worthwhile initiative, we are conscious of the significant challenges that must be overcome in order to ensure its accuracy – the small minority of company owners who wish to conceal their influence over a company are likely to continue to be able to do so.

13. We agree that the proposed central registry should hold information on companies incorporated in the UK, and that it should include LLPs. We observe that public companies listed on a regulated market (i.e. the Main Market of the London Stock Exchange) are already subject to stringent disclosure rules by the Financial Conduct Authority. As they will already have relevant information on beneficial ownership, there is little deregulatory benefit to be gained from exempting them from inclusion in the main central registry.

14. With respect to clause 73, we agree that, although bearer shares can be used for legitimate purposes, this is outweighed by their potential for misuse. Their continued existence is also inconsistent with the transparency agenda that has been addressed in this Bill. Consequently, we favour a phasing out of existing bearer shares over a period of time. This transition phase needs to be long enough to enable existing bearer shareholders to convert their shares into registered shares without any significant economic loss, given that many individuals may well be holding bearer shares for entirely legitimate reasons. Additional arrangements may also be required to protect the identities of vulnerable individuals. However, the issuance of new bearer shares could be prohibited immediately.

15. Clause 76 raises a number of interesting questions which we would like to comment on. Countries such as Switzerland, the Czech Republic, Jersey, and some US states have outlawed the use of corporate directors. We are sympathetic to this position. One of the purposes of the board of directors is to provide a company – which is ultimately only a legal concept – with a human face that can be held personally accountable. Although we recognise that corporate directorships may be an administratively convenient means of managing subsidiary companies and other corporate entities, their ‘non-human’ nature means that they undermine this basic principle of accountability. And by further distancing natural persons from corporate actions, they provide significant opportunities for abuse. For these reasons, we favour the phasing out of the use of corporate directorships. However, as with bearer shares, it is important to undertake this process over an extended period in order to allow companies to make new administrative arrangements without excessive disruption to their current operations.

16. The blocking of new corporate directorships could take place immediately. Existing corporate directorships should be given a number of years (e.g. at least 5 years) to convert themselves into natural directorships.

17. In broad terms we support clauses 78 and 79. We agree with these clauses and have no objections to them. However, we should add that there shouldn’t be a shadow director – all directors should be properly registered and appropriately referenced in annual report.

Company Filing Requirements

18. Clauses 80 – 91 contain a range of measures which stem from The Companies Red Tape Challenge. The challenge identified a number of measures to simplify the company filing requirements and reduce duplication of the requirements. The Department for Business consulted on these measures in November 2013 and published the government response in April this year.

19. The IoD is strongly committed to encouraging entrepreneurship within an appropriate regulatory framework. The ideal regulatory framework is one which allows companies to concentrate on running their businesses rather than having to deal with excessive bureaucracy.

20. The UK private limited company form is a well-established and successful legal vehicle for many businesses. But in order to sustain this success, it is important that the limited company’s regulatory regime remains light touch, low cost and conducive to a high level of company transparency.

21. Overall, we believe that the current Companies House (CH) filing regime broadly achieves these objectives. This is reflected in the fact that the overwhelming majority of companies comply in a timely manner with statutory filing requirements. The current filing and returns regime is not excessively onerous for companies, and most nowadays interact with CH online rather than by submitting paper forms.

22. Nonetheless it is important that CH exploits new ways of reducing the administrative burden on companies, particularly those SMEs that lack in-house secretarial or management resources. A modern digitally-based approach to company registration and administration provides the most effective way forward. Creating an efficient and cost-effective technological platform that facilitates the management and communication of reliable company information is the key challenge for Companies House during the next decade.

23. Therefore we are broadly supportive of these main proposals. Our conclusion is that changes relating to filing requirements will reduce the bureaucratic burden on SME directors and also assist them in preventing identity theft. We particularly welcome steps to provide directors with more information about their legal duties on appointment, although this falls short of a requirement for some form of induction or training for directors. We see this as a logical next step.

Directors Disqualification

24. Clauses in part 9, relating to director disqualification, are broadly to be welcomed. We deem most of these proposals as representing a step in the right direction, modernising older provisions, which don’t fit the current IP regime.

25. Our view is that director disqualification proceedings should always be a matter for a court (rather than a sectorial regulator). It need not necessarily be the case that a director prohibited from serving in a particular sector should be prevented from serving as a director more generally. However, we accept that it may be desirable to allow sector regulators to make applications to the Court for a disqualification. Whether this is approved should be a matter for the Court, taking all relevant circumstances into account.

26. We are strongly of the view that a director should not be penalised due to the mere fact of being a director of previously-failed companies. Such an approach is anti-enterprise and reflects a misunderstanding of (or antipathy towards) the functioning of a market economy.

27. Disqualification should only be affected by the track record of the director if there is evidence of proven wrong-doing in respect of previously-failed companies.

28. Clause 96: We have observed little evidence that the current approach is a cause for concern. It is important that potential disqualification proceedings do not hang over directors for extended periods, thereby affecting their ability to engage in productive economic activity.

29. Although there is some reference to director training in clause 89 (registrars’ duty to inform new directors of entry in register), we do believe that BIS could have gone a lot further and made explicit reference to how director training would increase trust in the enforcement regime. We would support this initiative, and stand ready to support BIS with the provision of this kind of remedial director education programme. If we are going to advance the cause of more effective and sustainable business, and improved corporate governance, we need to recognise the positive role that director training can play in the process. Director training should be seen as an important mechanism by which corporate behaviour can be influenced for the better – the entire focus should not be placed on legal and regulatory reform.

Insolvency regulation

30. On the whole we are supportive of the measures contained in Part 10. We think these clauses will make the insolvency regime fit for purpose in the 21st century. The 1986 Act is outdated and the proposals here make logical sense. As an aside, it is important to note that we have previously stated in earlier responses to consultations that "We are not persuaded that the existing insolvency system is somehow ‘unfit for purpose’ or acting as an obstacle to economic recovery, e.g. due to poor treatment of creditors. On the contrary, we believe that the current framework adequately balances the interests of the relevant company stakeholders. This view is consistent with the findings of the latest Insolvency Service survey which found that around 65% of those questioned had confidence in the current enforcement regime." That said, these proposals are generally inoffensive and are satisfied with the proposals outlined in this bill.

31. On the Graham Review (Clause 117) we are supportive of any attempt to provide more clarity about pre-packs, which are often criticised in the media. They have always had a valid role to play in saving jobs and economic capabilities. We sincerely hope the market supports and adopts the voluntary package outlined in Theresa Graham’s report. Enforcement of this packaged by legislation, as proposed in this clause, should be seen as a last resort only.

October 2014