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Lord Hodgson of Astley Abbotts: My Lords, do these measures apply to AIM companies and what is the position of foreign companies listed on the London Stock Exchange? I do not believe I had a response to those two matters.
Lord Sainsbury of Turville: My Lords, may I come back to the noble Lord on those matters? As I said, there are very many issues here which apply in different ways. I shall write to the noble Lord.
6.15 p.m.
Lord Sheldon: My Lords, I am not a director now, but I have been in the past. I am concerned about the role of non-executive directors. Some years ago a Permanent Secretary at the Department of Trade, having retired, was offered a non-executive directorship at one of the largest of the listed companies in this country. Nothing happened and he wondered why. He was told that the chairman had said that he would not have him because he would ask too many awkward questions.
When someone as competent as that—and he was an outstanding Permanent Secretary—receives that kind of reaction, it makes one worry about the kind of situation he was likely to have entered into. There is a need to strengthen the independence of a number of the non-executive directors. I would welcome that.
The legislation is obviously going to be very complex. Can my noble friend say anything about that?
Lord Sainsbury of Turville: My Lords, the independence of non-executive directors is a very important question. In order to protect my back, I take it absolutely sine qua non that a Permanent Secretary would be an excellent addition to any board. That is obviously unarguable. The Higgs report is about giving a much stronger position to the non-executive directors and much clearer independence. But in answer to the noble Lord's question, it is also a process by which they are chosen not on the whim of a chairman but through due process, which will widen the selection and make it more transparent.
Lord Williamson of Horton: My Lords, I declare an interest as a hard-working, non-executive independent director of Whitbread PLC and a member of its audit committee for a long time.
While I very much welcome what the Minister has said about non-audit services provided by audit firms, we need to be extremely careful about it. I agree with
the noble Lord, Lord Razzall, that the proof of the pudding is in the eating because it is a voluntary system although it underpins the listing requirements. We need to give a lot of attention to this matter.Does the Minister agree that with the many reports which we have had on governance, including the Higgs report, we have to be careful not to get ourselves into a position where we believe that every recommendation is automatically right. Some of the recommendations can be legitimately challenged on grounds of efficiency and how business should be conducted. For example, should a senior non-executive member of a board be appointed so that he can have further contact with shareholders? There are other ways to do that, and it is important not to get ourselves into the position of thinking that everything in a report must be adopted automatically. Some things can be done better in other ways.
Lord Sainsbury of Turville: My Lords, if the noble Baroness would like to answer the question, I am more than happy for her to do so. She is probably more qualified.
Much of the Statement meshes together. As important as distinctions between audit and non-audit work are, that question is in the context of the Smith report and its strengthening of the audit committee. The committee will have the say on the matter. That its independence has been greatly strengthened by the Smith report is very relevant.
We did not say that we would accept every recommendation of the Higgs report, but we looked at it carefully. It is an excellent report. We are impressed with the recommendations and will take them forward.
Baroness Noakes: My Lords, I apologise for jumping the gun. My eagerness on the subject overcame me. I declare a couple of interests as a non-executive director of listed companies, a member of audit committees and a member of the Institute of Chartered Accountants, although fortunately no longer an office holder.
I start by asking the Minister about costs. The Statement says that there will need to be more investment in the new regulatory arrangements and that the Government will pay their share. However, it is silent on how much those costs will be and how much the Government are prepared to contribute. I assume that they have not signed a blank cheque on that. Will he give us some more information?
Related to that is the impact of all the changes on audit costs. Is the Minister aware that audit firms in the US are talking about audit costs rising a minimum of 25 per cent, and often much more, to deal with the equivalent regulatory changes there? Do we think that there will be a similar impact on costs in particular? Have the Government thought about the impact of costs not on the larger plcs, but at the smaller end of the scale, which is the engine room of growth?
Finally, will the Minister say what the Government have achieved, if anything, in ameliorating the impact of Sarbanes/Oxley on dual-listed companies that have their main listing in this country?
Lord Sainsbury of Turville: My Lords, I cannot say much more about the costs of the Financial Reporting Council, including the foundation of functions. Clearly, we will try to proceed in the most cost-effective way, and the FRC will consult contributors, the Government, industry and the profession on firm budgetary estimates of its running costs. We think that the FRC's core annual running costs should be broadly shared by the Government, business and the profession, with two exceptions. The cost of cases heard by the investigation and discipline board should fall to the professional bodies concerned, and the cost of inspection by the independent audit inspection unit should be met by the audit firms. In both cases, that reflects the current position.
In terms of the impact on audit costs, one needs to keep a firm view on the end objective of the whole process, which is to make certain that company accounts are trusted by investors of all kinds. If that does not take place, we are in a serious situation in terms of the functioning of the capital markets. If that involves some extra expenditure but leads to trust in accounts, that would be money well spent.
The SEC is showing a welcome sensitivity to foreign concerns and to some issues arising from Sarbanes/Oxley on corporate governance, non-audit services and rotation of audit partners, in response to the pressure from the UK and the European Commission. We pointed out that sometimes the regulations do not turn out well, and there is sensitivity to some of those issues.
Lord Carlile of Berriew: My Lords, I apologise to the Minister for missing the first moments of his Statement.
Bearing in mind that the curse of many disciplinary tribunals is delay, does the Minister support the hope and expectation that the investigation and discipline board will be expected to create protocols that enable it to act quickly? Also, does he support the hope that it will have interlocutory powers and, where there are criminal investigations—such as by the Serious Fraud Office, which can be long delayed—disciplinary proceedings will not necessarily have to await the conclusion of criminal investigations?
Lord Sainsbury of Turville: My Lords, if I may say so, that is slightly jumping the gun in terms of where we have got to on the process. All the points that the noble Lord has made are in principle highly desirable but, in terms of where we have got to, I would jump the gun if I assured the House that all that would definitely take place.
Lord Naseby: My Lords, I declare an interest as a non-executive director of three companies—one listed, one mutual and one large private company.
The Minister made no mention of mutuals, at least two of which, Standard Life and Nationwide, would probably fall into the FTSE 100 if they were listed. Would the proposals affect the mutual sector as well? The Minister mentioned large charities. Is there a definition of a large charity?
My third question relates to Europe. None of us should ignore the fact that as we sit on our varying boards we not only have to cope with the FSA and its continuing consultation documents but increasingly have to take into view what is happening in Europe. Can we have confidence that Her Majesty's Government will not produce recommendations that then have to be amended two years on because of data or instructions coming out of Europe that we should have known about already?
Lord Sainsbury of Turville: My Lords, on the first question I would have to say what I said originally. What we have been talking about is an enormous and substantial package of proposals. They apply in different ways to different kinds of organisation. I cannot give a simple answer for mutuals or anything else without going through all the proposals and saying how they would impact on them.
So far as international standards are concerned, a lot of work is now taking place to make it certain that UK accounting standards are brought in line with international standards. In the world in which we live, that is clearly of increasing importance.
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