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Borough Freedom (Family Succession) Bill [HL]
Read a third time, and passed, and sent to the Commons.
Enterprise Bill
3.9 p.m.
Clause 1 [The Office of Fair Trading]:
Lord Hunt of Wirral moved Amendment No. 1:
- Page 1, line 5, after "corporate" insert "with both a chairman and a chief executive"
The noble Lord said: My Lords, we return to a subject which we have debated on many occasions; namely, good corporate governance. I want to speak to a number of amendments which are set out on the Marshalled List. Amendment No. 1, which is at page 1, line 5 of the Enterprise Bill, inserts after the word "corporate" the words "with both a chairman and a chief executive". Clause 1(1) will therefore read as follows:
- "There shall be a body corporate with both a chairman and a chief executive to be known as the Office of Fair Trading (in this Act referred to as 'the OFT')".
Amendment No. 2 seeks to insert at the end of Clause 1 a new subsection (4) which states:
- "In managing its affairs the OFT must have regard to the generally accepted principles of good corporate governance".
Amendment No. 3 would insert a new subsection (5) to the effect that,
- "The appointments of the chairman and the chief executive shall not take effect until they are confirmed by the House of Commons Treasury Select Committee following a public hearing".
Amendments Nos. 4 and 5 would insert the words "a chief executive" and "and the chief executive" on page 195, lines 5 and 7. I shall not go in detail into the remaining amendments in this group. Suffice it to say that they insert the words "the chief executive" after
the word "chairman" where it appears on page 195, with the exception of Amendment No. 13, which would delete the word "either" and insert "any".I hope that I have therefore explained this rather extensive group of amendments. This group may be large in number, but it is in effect arguing the case for good corporate governance.
I recall that when we debated this issue before, we had a look at the Cadbury report. This is a good opportunity to remind ourselves of that groundbreaking report which set out a number of aspects of corporate governance that have since been adopted almost completely. I think that the Cadbury report did a great deal of good in setting out some of the basic principles of good corporate governance. Paragraph 4.7 of the report, on page 21, addresses the whole issue of the chairman and envisages the chairman's role as follows. It states:
- "The chairman's role in securing good corporate governance is crucial. Chairmen are primarily responsible for the working of the board, for its balance of membership subject to board and shareholders' approval, for ensuring that all relevant issues are on the agenda, and for ensuring that all directors, executive and non-executive alike, are enabled and encouraged to play their full part in its activities".
- "Given the importance and particular nature of the chairman's role, it should in principle be separate from that of the chief executive. If the two roles are combined in one person, it represents a considerable concentration of power".
When we last debated the Cadbury report, at the Committee stage of the Financial Services and Markets Bill, I recall that the noble Lord, Lord McIntosh of Haringey, said:
- "I doubt whether they"—
- "are the most recent thinking on current good practice".—[Official Report, 16/3/00; col. 1717.]
The Hampel report was established to review the Cadbury code. On page 28 of the report, however, the chairman's job is described in exactly the same terms as Cadbury had described them. It states:
- "The chief executive officer's task is to run the business and to implement the policies and strategies adopted by the board. There are thus two distinct roles".
At paragraph 3.17, the Hampel report continues:
- "Cadbury recommended that the roles of chairman and chief executive officer should in principle be separate . . . We agree with Cadbury's recommendation and reasoning, and we also note that in the largest companies there may be two full-time jobs".
- "is that, other things being equal, the roles of chairman and chief executive officer are better kept separate, in reality as well as in name. Where the roles are combined, the onus should be on the board to explain and justify the fact.
- Cadbury also recommended that where the roles of chairman and chief executive officer were combined, there should be a strong and independent element on the board, with a recognised senior member . . . But even where the roles of chairman and chief executive officer are separated, we see a need for vigorously independent non-executive directors".
So that was Hampel. In order to persuade the Minister that this is the bang-up-to-date view, I wanted to submit two further pieces of evidence. The Chartered Institute of Management Accountants produced a report—a guide to corporate governance—in which, on page 9, it made it absolutely clear that it endorses that position on chairman and chief executive. It states:
- "The chairman of the board is responsible for the efficient running of the board . . . He . . . is therefore responsible for ensuring that the . . . Code's principles and provisions are followed. These require that there should be a clear division of responsibility at the head of the company so that no one individual has unfettered powers of decision".
On page 10, in describing the chief executive, the report states:
- "The chief executive is responsible for the efficient running of the company's business. He has, therefore, quite a different role from that of the chairman of the board. The Combined Code states that 'a decision to combine the posts of chairman and chief executive officer in one person should be publicly justified'".
The second piece of evidence is from the National Association of Pension Funds, which only last week produced a report in which it criticised the failure of a number of companies to observe the code. In an article in the Evening Standard entitled, "Drop those dual roles at the top says NAPF", it criticised companies which were still seeking to combine the roles of chairman and chief executive here, a decade after corporate governance pioneer Sir Adrian Cadbury criticised the practice. NAPF is described as the City's most powerful shareholder group, and it made it clear that it regarded that as unacceptable behaviour.
The Minister may seek once again to persuade us that the new Office of Fair Trading is unique in the world of corporate governance or—I refer to subsection (1) of Clause 1—in the world of bodies corporate. It is to be a body corporate. Therefore, I believe that the Government should pay more heed to the principles of good corporate governance.
Some would say that the principles of control freakery run so deep in this Government and in the institutions they create that that could constitute an explanation. However, it would be a brave Minister who would justify the matter in such terms before the House on Report. I hope, therefore, that the Minister might consider—if he wishes to intervene I may be able to cut short an otherwise long explanation in dealing with the other amendments—saying at the Dispatch Box, "Don't worry, we will observe the principles of good corporate governance and have a chairman and a chief executive". However, he shows no sign of leaping to his feet. Therefore, I shall now say why I thought that he would not do so.
We have the advantage of reading in the Sunday press an advertisement for the new Director-General of Fair Trading which stresses what an important job
he or she will do and the fact that he will be given many more powers than the existing Director-General of Fair Trading. The advertisement seeks to attract non-executive directors to what is termed "the strategic board". As I understand it, that is the only board of the Office of Fair Trading but perhaps the Minister will explain the word "strategic". However, it certainly spells out the importance of that body.In seeking to persuade people to apply, the advertisement states that the OFT has wide-ranging enforcement powers and will in future carry out some cartel investigations under the criminal law regime. The new director-general will have more wide-ranging powers than the existing director-general. But where is the strong independent element? The advertisement is for non-executive directors. What kind of commitment will they give? Will it be for most of the week or most of the month? No, non-executive directors will need to commit 30 days a year. If one divides that by 12, it is about two-and-a-half days a month. However, the advertisement states that that commitment will be dependent on their involvement in committee work. So, board members may well not commit as many as 30 days per year if they are involved in various OFT committees.
To compound our concern—this may appear a rather unnecessarily aggressive comment for this House when we have yet to decide the matter—apparently the Government have already decided not only that the new chairman will also be chief executive but also—as we discussed at earlier stages—that John Vickers, the Director-General of Fair Trading, will be the full-time chairman and the full-time chief executive of the board. But where is the independent element that is so necessary in a board which is to have these wide-ranging powers? The Minister may well come to the Dispatch Box and say, "Ah, we have a similar situation to the Financial Services and Markets Act in that we have someone who will not take the post unless he is chairman and chief executive". That was the argument used with Sir Howard Davies which carried a great deal of weight with the House as we all considerably respect Sir Howard. He has done an outstanding job as chairman and chief executive of the Financial Services Authority.
However, when we debated the then Financial Services and Markets Bill I recall that the Liberal Democrats commented that they detected that although the Government were not prepared to move on the issue at that moment, they were prepared to consider appointing a chairman and a separate chief executive of the Financial Services Authority when Sir Howard Davies retired. I recall that the noble Lord, Lord McIntosh of Haringey, did not seek to contradict that assumption from the Liberal Democrat Benches. Therefore, I hope that during the course of this debate or elsewhere, the Minister will indicate whether that is still the Government's intention.
After having done an outstanding job in setting up the Financial Services Authority, Sir Howard Davies has indicated that he wishes to retire. I challenge the Minister and his ministerial colleagues to consider
appointing a separate chairman or, if Sir Howard is to remain chairman, a separate chief executive of the Financial Services Authority. I believe that that would be a wise move in any event to enable the overlap from one chief executive to another to be more satisfactorily dealt with, if, indeed, the Government are now persuaded to have two separate posts, as I hope they are. I believe that it would greatly assist the governance of the new Financial Services Authority if it were to have a separate chairman and chief executive.I return to the new Office of Fair Trading. It seems to fly in the face of all the speeches that were made during the course of the then Financial Services and Markets Bill for the Government to insist that the chairman and chief executive should be the same person. I know John Vickers who has been an exceedingly good director-general, but I am sure—as I believe Sir Howard Davies will have found—that it is very helpful indeed to have a non-executive chairman to assist one in handling the extensive responsibilities not only of the Financial Services Authority but also of the new Office of Fair Trading. It would be a good move if the Government were able to accept the amendments we are discussing.
In conclusion, I hope that the Minister will accept Amendment No. 2 which states that,
- "the OFT must have regard to the generally accepted principles of good corporate governance".
Finally, I hope that the Minister will listen to noble Lords on all sides of the House who seek in some way to entrench in a new and exceedingly powerful body the principles that I have outlined. There is a feeling in the Houses of Parliament and outside them that the question of who regulates the regulators must be addressed. A number of regulators have sprung up. I take full responsibility for the creation of a number of such posts, having been a junior Minister at the Department of Energy and having held various other
ministerial posts. However, that was at a different stage. Since then, a number of regulators have been appointed. We must now address much more clearly the question of who regulates the regulators. If the principles of good corporate governance are involved, I wish the new Office of Fair Trading well. I beg to move.3.30 p.m.
Lord Borrie: My Lords, I rise to oppose Amendment No. 1 and the consequential amendments grouped with it.
I need hardly refer to Amendment No. 3 because the noble Lord, Lord Hunt of Wirral, has already indicated that he does not expect it to be agreed to. That is right because it would be wholly undesirable, in this Bill and in relation to this particular post, if a broad change of that kind were made; it would involve making the appointment acceptable to a House of Commons Select Committee although no other appointment would be made on that basis. A much broader discussion across the general world of public appointments is needed before agreeing to that substantial change of principle, which I am sure fascinates all of us. We should consider the example of the United States, where Senate approval is needed. However, to introduce that concept in relation to one official in this country on this one occasion would be very odd; we should discuss the proposal on a much broader basis.
I turn to the main amendment. All of the noble Lord's points related to public limited companies. A discussion of corporate governance has been through all of the splendid committees to which he referred, including Cadbury, Hampel and Turnbull; all of them were concerned with the governance of public limited companies. There is no necessary read- across from the governance of public limited companies to government agencies, whether we are discussing the Office of Fair Trading or others. One must consider what is required of each of them. The noble Lord surely cannot argue that Cadbury, Hampel and the rest of them were thinking of bodies such as the OFT, the Office of Gas and Electricity Markets or the Financial Services Authority when it contemplated the problem of the governance of private and public limited companies.
In any case, the noble Lord completely omitted the point that there is no statutory requirement for public limited companies to have the posts of chairmanship and chief executive in separate hands. That is laid down as a recommendation in the combined code that followed Hampel. I have for some years been a sort of serial non-executive director of various companies and I fully agree with those proposals and with the idea that, normally speaking, companies should have a non-executive chairman and a chief executive and that those posts should be held by different persons. However, there is no statutory requirement, and rightly so. The noble Lord wants to introduce a statutory requirement that, irrespective of the particular needs of the moment—or, for that matter, the longer-term needs of the country in relation to the
governance of the OFT—there should be a rigid requirement that the posts of chairman and a chief executive should be held by two persons.The Bill as it stands does not have any rigid requirements to the contrary. It does not require that the posts of chief executive and chairman should be held by one person. The board is described in Schedule 1 and the advertisement for non-executives is part of the process of getting the other members of the board together. The Bill allows for the possibility of those two posts to be held by one person. As the noble Lord, Lord Hunt, accurately pointed out, the Government have indicated that they have it in mind that the first chairman should be not only chairman but also chief executive, and that it should be Mr John Vickers, the current Director-General of Fair Trading. The Bill leaves open the possibility that two persons should hold those two posts, as and when circumstances suggest that that would be better. That flexibility is much more desirable than the rigid requirement for which the noble Lord, Lord Hunt of Wirral, is asking in the amendment; that is, that once the Bill is enacted and without any question, two persons should hold those two separate posts.
Of course there are practical arguments for suggesting that the roles are different. That is shown by examples of the corporate governance of public limited companies. It could be desirable for the chairman to have someone else to take the full burden of administrative and managerial responsibility. There is nothing in the Bill to prevent a deputy from being appointed. The noble Lord will remember that the Minister said in Committee that one or more of the members of the board might be executive members of the board. One of those executives could be a deputy who could be given charge of administrative and managerial responsibilities, and the chairman and chief executive could take the broader role. That seems perfectly sensible.
In order to distinguish the OFT from public limited companies, in relation to which the principles of corporate governance suggest that normally speaking the two roles should be in separate hands, I point out that decision-making under the Bill—we will discuss such matters later—and, for that matter, decision-making under the Competition Act 1998, should be speedy and effective. I believe that the Government have indicated that it is likely that the board will need to delegate to the chairman many executive decisions about mergers and whether there should be an investigation of a particular industry; I support that. I should not like to see diffusion or confusion between two persons of equal authority. One can have a person in charge, of whom it can be said, "the buck stops here", and a deputy, but at this early stage, when the Bill will be beginning its operations, it is desirable, as the Government suggest, that the posts of chief executive and chairman should be held by one person.
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