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Lord Brennan: My Lords, I thank the noble Lord for giving way. He was not concentrating sufficiently. When he looks at tomorrow's Hansard, he will find that they figure clearly in the list.

Lord Marsh: My Lords, I am glad that I did not misjudge my affection for the noble Lord.

There was also a reference to the fact that "confidence needs to be restored". My basic criticism of the report—and for me it is a serious one—is that it assumes a level of amateurism at board level which has not existed in this country for some years past. Few human institutions ever achieve perfection and the company boardroom is no exception. But the changes that have taken place over recent years, starting in the mid-1980s and going right through the 1990s, have produced a much more sophisticated and effective corporate governance and financial regime in the United Kingdom and—I am sticking my neck out—it is certainly in advance of that in the United States.

Yet some people are still living in a world where they conjure up this bogey board that is comprised of old colonels and which puts each other's mates on it. Of course there are small boards that do, but there is a degree of personal liability—and I shall return to that subject—which hovers above every director of a public company. As I have often said, I have never been particularly moral, but I am distinctly cowardly on these occasions and board members do not take kindly to people they cannot rely on and trust nowadays.

So my first point is that the situation has changed. Of course corporate management needs to be continually monitored because change is a constant feature of a modern global business. But the suggestion so often implied in this country that corporate incompetence exists on a scale which threatens a systemic failure is simply not true. If it were true, we would not have the high performance of our businesses in this country in industry and, in particular, in commerce.

I do not believe that Enron could happen today in this country. Having recently had to approve the audit committee report of a company I chair, I was then handed a 13-page draft letter to the auditor which explained in great detail how each member of the board fully understood and took responsibility for every single issue identified in the report and accounts. I do not complain about that. I believe it is a very good thing. But it exists to an extent which is not the case in some other countries.

On that point, one area where we are weak and where the Americans are ahead of us is that people who commit offences which they must know as directors are "dodgy"—to use the vernacular—should go wherever possible to gaol. If that is not possible, they should at least be disqualified. That did not happen in Maxwell as a result of the embarrassment it would have caused both political parties and it has not

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happened in a number of other cases. That is one way far more effective than any other to get discipline into such companies.

So what does that 120-page document bring to the British boardroom? Much of it—surprisingly, given the high reputation of the author—is a series of statements of the obvious that make it difficult to take the rest of the report seriously. I shall cite only a couple of the many similar exercises in banality. In a paragraph on the company secretary—let us remember that the report is addressed to members of boards—it states:

    "The role of the company secretary is important in the provision of information and more widely in supporting the effective performance of non-executive directors".

Another paragraph states:

    "The company secretary has a wide range of responsibilities but among those most central to enhancing non-executive director performance are the facilitation of good information flows, provision of impartial information"—

and it continues at length and states:

    "All the board also need a clear understanding of the role of the company secretary".

If I found that I had joined a board whose members did not understand the role of the company secretary, they would not see my backside for dust.

I choose another example at random. Much of the document views the appointment of board members as one would that of executives—but they are not the same. There is, for example, a,

    "Pre-appointment due diligence checklist for new board members".

It states that the first question that candidates should ask themselves is:

    "What is the company's financial position and what has its financial track record been over the last three years?".

Other questions include:

    "What are the exact nature and extent of the company's business activities?",


    "Who owns the company . . . ?".

A candidate who would not have already obtained that information should not be allowed out on his own at night, much less join a board.

I am running over my time, for which I apologise. Basically, no board can function effectively unless its members trust and respect each other. Several noble Lords have effectively said that no board can be left to its own devices. The role and responsibilities of directors of public companies are unique within the company. They are not the same as the role of a middle rank executive; that produces constraints and is why directors will usually seek someone with some understanding of board procedures, not necessarily with experience of serving on a board, but a senior executive with experience of being called before the board.

This is a bad report.

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5.33 p.m.

Lord Paul: My Lords, I, too, thank my noble friend Lord Brennan for initiating this debate. I declare an interest as chairman of Caparo Group, a United Kingdom industrial company.

I applaud attempts to amend our business policy and to institute structural reforms of businesses. I therefore welcome the Higgs and Smith reports and hope that we continue to maintain a discussion about mending flawed institutions.

However, the Confederation of British Industry's recent survey of company chairmen suggests that business leaders do not agree with all of the structural reforms proposed in the Higgs report. There is a reason for that concern. If we create too many structural regulations and limitations, running a company may become difficult. For instance, it simply does not seem practical to have directors watching over each other. That would take executive directors' time away from more productive work, making even perfectly honest businesses less efficient and less competitive. Although such efficiency losses would be worthwhile if we could thereby eliminate corporate fraud from our economy, the fear is that such institutional reforms might fail to bring about true change in business practices.

To my mind, there are two issues. The first is that the key to corporate governance is the accountability of individuals and corporate bodies and a clear understanding by shareholders, employees and the community of the obligations and duties of corporate managers. Further work is required in that area. For example, my company Caparo sued for negligence the auditors of a public company that it acquired in which the directors had perpetrated a massive fraud. The case came to your Lordships' House, where it was ruled that auditors owed a duty of care only to the company, not to the investors, shareholders or any other stakeholder.

Although one can accept that as a correct interpretation of the law, it runs contrary to popular belief about the role of auditors in corporate governance. So, in addition to establishing a framework of corporate governance, more needs to be done to communicate to stakeholders at large what are the exact duties and responsibilities of individuals and corporate bodies.

The second issue is more concerned with the future as, so far, we in this country have been fortunate. When a corporate leader comes to believe in material success as an end in itself, no matter what it takes to acquire that success, structural obstacles to fraud and corruption become just obstacles—to be overcome, to be surmounted.

An entrepreneurial individual who has managed to lead a powerful company successfully has already proven his comfort with risk and willingness to face obstacles fearlessly. We must therefore address the most fundamental aspect of corporate governance, which is the personal honesty and integrity of business leaders. For a company to be successful—for it to benefit not just its shareholders but its workers and the

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community that it serves—its managers must act ethically. Wealth can be a menace that can sometimes lead decent people astray. I do not say that power and wealth will always corrupt. But although a businessman without ethics may be financially successful, his success will come at the expense of the community at large.

So how can government encourage self-restraint in those who would misuse wealth and power? To be really effective, restraint—restraint that stems from a sense of responsibility and therefore produces moral obligations—must come from within the individual, not from legislation. We are not born with restraint; we must learn by example. Those who accept the need for moral values must expound those principles. As a Parliament, we must embrace discussion of personal ethics and responsibility.

I am hopeful that an emphasis on personal integrity will become an important part of all future discussion of corporate governance. Sadly, we are seeing a new bumper crop of trouble in the business world. We have again seen that the root cause has been greed, coupled with the abdication of personal responsibility. Let us, then, not shy away from an ongoing discussion of how to ensure that ethics—norms of honesty and integrity—become entrenched in the mindset of the entire business world.

5.39 p.m.

Viscount Chandos: My Lords, I join noble Lords in thanking my noble friend Lord Brennan for his initiative in proposing the debate on this important subject and for the clarity and elegance of his introduction. I declare my interests, listed on the Register of Members' Interests, as the chairman of one listed company, an independent non-executive director of another and the director of a number of private companies.

My 15 minutes of fame last year, when I was named runner-up to the noble Lord, Lord Razzall, in the number of directorships declared in the Register of Lords' Interests, illustrates the difficulties of being prescriptive about the number of directorships that might properly be held, given that many of my entries related to a single activity as a venture capitalist. The Financial Times, adopting the journalistic standards of the Sunday Sport—"Elvis Presley is alive and well and sits on the Enron audit committee"—tried then to draw a conclusion on corporate governance and the relationship between Parliament and business, based on an analysis conducted with the thoroughness and logical coherence of a last-minute undergraduate essay.

By contrast, the Higgs report has steered deftly through the opposing rocks of complacency and over-prescriptiveness. Whatever refinements and amendments might be proposed should be warmly welcomed. In the time available, I shall concentrate my comments on the Higgs report. But I welcome the equally helpful and valuable report chaired by Sir Robert Smith.

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The expressions of outrage emanating from some of the past and present chairmen of our largest companies do not represent a sensible contribution to this important debate—it is more like the harumphing of bull elephants confronted by the need to walk a little further to find their water hole. I hope that, if in the future my noble friend Lord Brennan introduces a third debate on the subject, some of the distinguished FTSE chairmen and chief executives past and present who are Members of your Lordships' House will be able to put their views directly to noble Lords.

Although corporate governance in the UK is generally good by international comparison and has been improving, we should recognise the many and varied imperfections that have existed and, to some extent, persist. My happy memories as a board colleague of the noble Lord, Lord Marsh, cannot reduce the extent of my disagreement with him on that point.

Ten years ago, the ubiquitous Sir Roland Smith, whose multiple directorships prompted the Financial Times to propose a Roland Smith index of companies, was asked, shortly after his removal as chairman of British Aerospace, what was the most important attribute in a non-executive director. "Loyalty", he cried—and I do not think he meant loyalty towards the interests of shareholders.

Much more recently, when I was advising a substantial listed company, I expressed surprise to one of the non-executive directors at the financial commitments that had been made by the chairman to activities far outside the company's core business without any identifiable process of board approval. "Ah!", said this pillar of the City establishment, "you must understand that we have continued to be run very much like a family company".

Let me read from an announcement made to the London Stock Exchange:

    "Following a preliminary investigation . . . it is clear that all but a small proportion of the company's cash holdings are no longer under the company's control. The exact whereabouts of the company's funds are still being investigated. However, it has been established that most of the company's funds have been transferred to associates of Orb a.r.l.".

The date of the announcement was 10th January 2003. The company, Izodia plc, may not be a household name, and the sums missing—"only" £30 million, I understand—may not rank with the greatest corporate disasters, but it is a timely reminder to guard against complacency.

That last example provokes this question: what do we believe good corporate governance is intended to achieve? Are we most concerned about protecting companies, their shareholders and employees from the foolishness of fools or the knavery of knaves? I believe that it is both, equally. The comments of my noble friend Lord Haskel on that point were correct.

As my noble friend Lord Brennan said, it is undeniable that well-planned fraud is difficult for an executive director, let alone a non-executive director, to detect in time. But an effective board should preside over systems, controls and a corporate ethos that minimise the risk of such fraud being perpetrated.

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Companies must take risks to survive, let alone to grow. Sometimes that risk is encapsulated in a strategic decision—or a series of decisions—in which the whole board will have been intimately involved. Whatever the quality or the independence of the non-executive directors, those strategic decisions will sometimes be wrong, occasionally disastrous. But an effective board, once more, with non-executive directors who are, as my noble friend Lord Haskel advocated, constructively involved as well as rigorously vigilant, should improve the odds of success, which, as those of our colleagues who may be at Cheltenham would confirm, is what it is all about.

As the noble Lord, Lord Freeman, said, the Higgs report as a whole should be welcomed because its recommendations should contribute to the effectiveness of boards in both the areas that I have just outlined. I do not believe that the recommendations regarded as most contentious—the role of the senior independent director and the chairmanship of the nominations committee—represent a real threat to the authority or effectiveness of a company's chairman. What is more, those recommendations are always subject to the principle of "comply or explain". In particular, Mr Higgs has justified his decision not to propose separate guidelines for smaller listed companies by the ability of companies to explain their reasons for incomplete compliance.

It is on that key issue that I should like to end. "Comply or explain" lies at the heart of the non-prescriptive approach of the Higgs report and is crucial to the workability of the proposed system, particularly for smaller companies. However, what the principle requires to work is the commitment of institutional shareholders to give the time to assess each company's explanation of partial compliance; otherwise the desired flexibility of Higgs will be lost and its guidelines will instead become by default a rigid set of rules. The institutions, which in my experience have been generous in their provision of time to consider and agree selective non-compliance by a company one-hundredth the size of a top-20 FTSE group, face a significant challenge in maintaining that standard as their caseload continues to grow.

5.47 p.m.

Lord Barnett: My Lords, I join those who congratulated my noble friend Lord Brennan on initiating this important debate. I have registered a number of modest interests in non-executive roles in minor companies that are not strictly relevant to Higgs. I assume from the title of the debate that it refers largely to Higgs. There have been many other reports before Higgs—the Cadbury report, the Greenbury report, the Hampel report, combined codes, corporate governance codes, the "Winter group" in the European Union and the Myners report. To those reports we now add Higgs.

In the short time available, I shall not deal with the detail of Higgs. I shall concentrate on the central question of corporate governance: who controls the

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major companies, and who should control them? I refer not only to the FTSE 100—some large companies drop out from time to time.

I share many of the views expressed by the noble Lord, Lord Marsh, on the Higgs report. I found much of it trivial and vacuous, to be honest. I shall give some small examples. Page 5 states:

    "The board is collectively responsible".

Well, that is a shock to us. It is stated on the same page:

    "The chairman has a pivotal role".

He certainly has a role. Page 6 states:

    "All directors should take decisions objectively in the interests of the company".

That is a surprise; maybe some do so. On page 77, under the heading "Principle", the report states:

    "Every listed company should be headed by an effective board".

Well, there you are. That is what needs to be done. Talk about a statement of the obvious, as the noble Lord, Lord Marsh, said; that is precisely what those are.

We did not need Higgs to tell us the action that was needed. Nevertheless, there are, in those 120 pages, some items with which I agree. There are some proposals that are worth consideration. Certainly, the status quo is not an option, and action is needed.

There is some confusion in the Government's position, if I may say so to my noble friend who will reply to the debate. As usual, I am not sure whether the DTI or the Treasury is in charge of the matter. There have been many Treasury statements about who is backing or not backing the Higgs report or letting it go by the board. Perhaps, my noble friend will tell us. In the most recent article in the Financial Times, we are told that the Government back Higgs. I will be interested to hear my noble friend clarify the Government's position today. He usually accepts my advice: he did so yesterday with regard to excessive remuneration, although he did not tell me what he considered to be excessive.

I hope that he will confirm today that the Government do not have in mind legislation to implement Higgs. That would be the last thing that we need. I assume that my noble friend can tell us that he proposes to have a code-based system and that the code will be in the charge of the Financial Reporting Council, even though, as we are told in some quarters, the FRC is likely to water down Higgs. I will be interested to hear from my noble friend what he would do if it proposes to water down Higgs, which I would not mind.

We are told that the chairman has a pivotal role. That is true, whether he is an executive or non-executive chairman. The chief executive, the finance director and the chairman run the major companies; we need not dispute that. Who appoints those people? That is what I want to concentrate on. Who keeps them in their job, when they do a disastrous job? That is a crucial matter, but it is not a matter for legislation.

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Legislation cannot decide who is a good chairman or a good chief executive. It is for the owners of the company to decide.

Not enough has been said about the owners of companies. In most FTSE 100 and other large companies, the owners are not the small shareholders; more than 70 per cent of ownership is in the hands of major institutions. Often, those institutions are not doing the job that they should do. They are responsible—or should be—for the appointment of non-executive directors, who play a crucial role in making sure that the management of a company does a decent job.

My noble friend Lord Fyfe of Fairfield made the good point that good non-executive directors do not grow on trees. That is true. Institutional shareholders are not doing the job. Too many non-executive directors do not or cannot either do the job or give up enough time to do it. That is a challenge to the owners of the company. We do not need to be told that they need integrity; of course, they do. They need competence, as well; they must be able people. Too many are appointed because they are friends of the chairman or the chief executive—not all, but too many. As I said, legislation will not produce better non-executive directors.

The real answer must be for the owners of companies to do the job that they should be doing on behalf of all the shareholders. The major institutions do little or nothing of the job that they should do. If they do anything, it is usually too late. The first solution must be for those major institutions—not the Government—to ensure that non-executive members of boards of companies in which they have a major shareholding are not just cronies, if that is the word, but are good, able people of considerable integrity and ability and do not sit on too many other boards.

The job should include a proper internal audit system. Happily, I do not think that we are likely to have another Enron-type affair here, for the reasons that have been given. Fraud involving collusion between the chairman, the chief executive, the finance director and the senior audit partner would not be easy to spot for even the finest, most able non-executive directors. However, if, at least, there were a proper internal audit system—however costly—there would be a chance of spotting it. Without it, there is no chance. Good non-executive directors will ensure that there is a good internal audit system, and their appointment is the responsibility of the institutional shareholders who own the companies. They are not doing the job: I hope that we can ensure that, in future, they will.

5.55 p.m.

Lord Williamson of Horton: My Lords, in intervening in the debate, I declare an interest as a non-executive director of Whitbread plc and a member of its audit, nomination and remuneration committees.

In recent years, there have been several reports—good, for the most part—on corporate governance. They have generated a large corporate governance

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industry. I suppose that, like me, all company directors receive their daily postbag of invitations to seminars and breakfasts on the subject. The reports have also generated a remarkable facility among company secretaries for inserting ticks in appropriate boxes.

Now we have the Higgs report, and with it has come an element of unjustified polarisation between the assumption that all the report's conclusions are, almost by definition, good and the opposite view, summarised by the Financial Times headline,

    "FTSE 100 chiefs oppose Higgs reforms".

The Minister may say that the Government are more selective in their approach to the Higgs recommendations. If so, I shall be glad to hear that. However, the impression of a polarisation of views is evident in press and other comment.

It would be odd if, after so much attention has been paid to corporate governance, a report were to come forward that was worthy of complete acceptance or rejection. That cannot be the case. There is a series of recommendations: some desirable, others a matter of judgment and some likely to have only a marginal effect. I am in favour of proposals to widen the range of persons—male and, particularly, female—suitable and willing to serve on company boards. I am also in favour of separating the role of chairman and chief executive, not so much as a matter of corporate governance or propriety but because both jobs require a substantial commitment of time and attention. Whatever is done with regard to other recommendations, it is important that nothing be done that, perhaps inadvertently, diminishes the role of the chairman, who has the greatest responsibility for the health of the company.

Some other recommendations are rather innocuous. I would not be prepared to go to the barricades about them, particularly if two things were recognised. First, different circumstances in different companies may make it undesirable to follow a particular recommendation. Secondly—this is self-evident—a company should always indicate why it has not followed a recommendation.

I shall make two more general comments on matters to which I attach importance. First, I am surprised by the assumption that a board consists of two blocs of members—the executive and non-executive directors. In the direction of a company, it is just as likely that there will be disagreement among the non-executives as it is that there will be disagreement between the executives and the non-executives. The fear that executive directors will be hell-bent on some dangerous scheme, while the non-executives restrain them, is, to say the least, an excessively simplified view of the difficult choices on a company's development that the whole board must make. In short, non-executives have a role, and improvements in the way in which it is performed, resulting from the attention given in recent years to corporate governance, are, generally, good. But it is hardly realistic to think that they can, in themselves, determine the development of a company.

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Secondly, it is naive in the extreme to suppose that there is a direct and necessary relationship between passing the good governance tests and running a profitable company for the benefit of its personnel, shareholders and the country.

Some facts about past experience, like the facts about loss of value by public companies even before 11th September, are rather uncomfortable. However, I should like to refer to them in order to emphasise that further action on good governance may be desirable in itself but that it does not—I repeat, not—necessarily correlate with good financial results. Even that paragon of financial comment, the Financial Times, in an editorial on Monday stated:

    "Investors have seen share price collapses in companies such as Marconi, BAE and Reuters whose corporate governance would have fallen foul of Higgs",

at least implying that there was some connection.

Some of the companies which have gained most in value have been least compliant with past recommendations on governance; and some of the companies which have lost most value have been most compliant on governance. For example, looking at the total return to shareholders of the FTSE 100 companies in the five years ending 2001—thus excluding any distortion from recent political events—some companies made very good increases, but the bottom quartile made a negative return. In short, their shareholders would have done better to put their money on bank deposit, because it was worth less to shareholders at the end of the five years than at the beginning.

However, we also note that these poorly performing companies scored the highest marks for corporate governance; and the best performing companies scored the lowest marks for corporate governance. We must not confuse the form of corporate governance with the reality of long-run total shareholder return. Furthermore, the salaries of the chief executive officers of the worst performing companies were higher than the salaries of the chief executive officers of the best performing companies.

I do not want to be misunderstood. I do not say that that implies that the whole of the corporate governance industry should be thrown on the scrap-heap. On the contrary: I have already indicated that I fully support some important recommendations of the Higgs report. However, the past experience that I have quoted deserves serious reflection, particularly in a period when many pension funds are holding shares in companies which have fallen disastrously in value.

My own conclusion is a more general one. Our prime objective today should be to do all that we can to ensure that we do not have widespread loss of value in public companies. That means attention should be given to the burdens of bureaucracy, taxation and too much short-termism—issues which we all know are wrong—and that we do encourage shareholders to give a lot of attention to a link between salaries and performance. In short, not the form but the substance.

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6.3 p.m.

Baroness Cohen of Pimlico: My Lords, I, too, thank my noble friend Lord Brennan for introducing the debate. It is extremely timely. We speak of little else in the City. I have been dying to give my own views rather than listening to other people.

Against that background, I declare an interest; I am chairman of a smallish FTSE company and a director of the London Stock Exchange. That makes it particularly important to state that my views are my own. The London Stock Exchange has not yet had the opportunity to take a collective view on both Higgs and Smith; and I should not wish to label them with mine.

Both the Higgs and Smith reports arise out of a statement of objection—as so often occurs—to the state of affairs in America that led to the strong regulatory reaction of Sarbanes Oxley. On thinking about what went quite so wrong in the United States of America and in the conduct of major US companies, it is important to understand that their attitude to accounting—to "doing the numbers"—at that time was very different from our attitude in the United Kingdom. It is odd that I, a lawyer, am defending the accountancy profession, but I think that we always did it differently.

We do not always get it right, but auditors of United Kingdom companies are looking for and certifying that the accounts represent a "true and fair" picture of what is happening in the company. That was not a concept that United States' companies adhered to very much. They believed that there were rules applying to a set of accounts. Within those rules you put your best foot forward—you put down what you could get away with. In the United Kingdom, I believe that our auditors—whatever their omissions and difficulties—have always started from the basis of a "true and fair" account.

That is very different from the American concept of "aggressive accounting", when one tries to do one's best. Of course, there are all sorts of other conflicts and difficulties in US corporate life, but I believe that at the bottom of the worst excesses lays the concept of aggressive accounting—only tell as much of the truth as you absolutely have to, as opposed to the concept of a "true and fair" view of the company.

I always start with the accounts because I believe that they are truly important. Therefore, I have only trivial reservations about Sir Robert Smith's suggestions. Sir Robert and I were colleagues in The Charterhouse Group. He ran a distinguished venture capital operation. No man is better equipped to get at the truth of a company's accounts than a serious venture capitalist who bets his name and reputation on just that ability.

However, I have some reservations about the recommendations of Mr Higgs. I hesitate to offer them because I have been around long enough to remember the cries of grief and outrage from some quarters that greeted the recommendations of Sir Adrian Cadbury.

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"Three non-executive directors", we cried in horror. "Chairman and chief executive not to be the same person". "Woe to this fair country."

Although in 20 years I may turn to what I say today and wince, I believe that the recommendations of Mr Higgs would, if implemented, make the role of a chairman substantially more difficult. And I speak as a chairman. I need to chair the nominations committee. I need to speak directly to my shareholders, at the same time, and, roughly speaking, say the same as my chief executive officer. If shareholders do not trust either of us, they are quite capable of organising a coup without the help of a senior non-executive director. They would probably use the press; they do not need a senior non-executive director.

The Higgs report is also stiff with recommendations which to a small company will come very expensive. At the company which I have the honour to chair, I would have to appoint another two non-executive directors, in addition to the three we already have, in order to out-number my executive directors. In terms of pay, rations and management, we would be grossly top-heavy. When I raised that point with Mr Higgs recently, he said that all his recommendations were on a "comply or explain basis".

"Up to a point, Mr Higgs" and for that matter, my noble friend Lord Chandos. Tell that to the institutional shareholders who will, I believe, ultimately be driven by their own structures to force us all to comply with every last bit of it—whatever it turns out to be. All right, there are distinguished and visionary institutions which will accept an explanation rather than compliance, but most of them will force us through the whole course—whether this be a code or a basis for legislation. Therefore, I am very anxious about some of the more onerous recommendations.

I agree that more non-executive directors are needed. I have never shared the view that there is a self-selecting crony group of people appointing each other to company boards. If there were such a group, I wish it would ask me to join. But it does not apply to women; I am quite, quite sure of that. I am sure, too, that the noble Baroness, Lady O'Cathain, would support such a group. I do not think that either of us have ever been appointed to a job other than by grinding through the executive search process.

However, there are difficulties with widening the scope. Unless there are to be two classes of non-executive director—one of whom is not required to sign the onerous documents which state that we have looked at the system of financial control, that we are satisfied that it exists, and that we are satisfied that it works—a good deal of technical training will be necessary if the ranks of non-executive directors are to be widened, for instance, into the ranks of academics or other useful groups. Quite a serious training requirement will arise, which I know a good many people are thinking about. I hope, too, that the business schools are considering it, because we shall need new types of recruits if we are to have more and better non-executive directors.

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Finally, I would observe that if you want to limit the number of non-executive directorships held by an individual—I think that should be done, or perhaps I am just jealous—then the pay will have to be better. The going rate for a non-executive director is £25,000. If someone has retired early and is serious about maintaining their income as a former senior executive, then quite a number of non-executive directorships are needed to make up the pay. Furthermore, the sheer weight of demands being made on non-executive directors means that we shall have to think about paying them more.

That remark takes me back to the point I made earlier about the burden on small companies. Some of the proposals will prove to be excessive and top-heavy. With those reservations, on the whole I welcome both the Higgs report and the debate.

6.11 p.m.

Lord Berkeley: My Lords, I congratulate my noble friend Lord Brennan on the debate. I certainly support the Higgs recommendations and I am pleased that the Government do so as well. I believe that the House, too, has given a general welcome to the proposals this afternoon.

The Higgs report relates to public companies, but I suggest that the Government should set an example by including certain relevant parts of it in the rules governing non-departmental government bodies, or quangos, which is the term I shall use during my remarks. It is easier to say. I cite the Strategic Rail Authority as an example of a quango that would benefit from some of the recommendations. In doing so I declare an interest as chairman of the Rail Freight Group.

I should like to look at some of the recommendations that might be relevant to a quango such as the SRA. There are many similarities in relation to corporate governance. First, I turn to shareholders. Let us be clear: quangos have shareholders in the form of government, Parliament and us, the taxpayers. Secondly, I turn to the question of whether there should be a separate chairman and chief executive. Many noble Lords have commented on this. Higgs has recommended that the roles must be separate, but within the Strategic Rail Authority they are not. The noble Lord, Lord Williamson of Horton, suggested that the roles were too much for one person if they are properly to run a company. I agree with him. We should note that effectively the SRA is managing the railway system.

Within the SRA, the chief executive is the accounting officer responsible to Parliament for reporting on finance and keeping within budget, while the chairman's role is probably to ensure that the shareholders and outside interests are involved. Those interests include parliamentarians, local authorities, pressure groups, real customers, the media and many others. Of course it is also necessary for the SRA to comply with all the relevant legislation, directions and guidance sent out rather frequently by the Secretary of State. I suggest that all that is too much for one person to handle properly.

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Luckily, however, the chairman and chief executive of the SRA have a board that meets every two weeks or so. But who appoints the board? Higgs has recommended that the board should be appointed by a nomination committee not chaired by the chairman. One or two noble Lords have disagreed with that proposal. The Secretary of State appoints the board of the Strategic Rail Authority on the recommendation of the chairman. As many public limited companies have noted, it can be said that the board comprises a nice, cosy group of friends—although I realise that my noble friend Lady Cohen would not agree with that comment—who have every incentive not to ask awkward questions or rock the boat. Perhaps the Higgs recommendation that the board members should sometimes meet formally without the chairman being present would help.

Then we have the customers, or shareholders. Passengers are represented by a statutory body, the Rail Passengers Council, whose duty it is to look after passengers' interests. Who funds that council? It is the Strategic Rail Authority. That is rather like a public limited company funding its own shareholder action group and then complaining loudly if the group disagrees ever so slightly with company policy. I do not think that that quite follows the Higgs line of thinking. He would probably veto such a system. But that is what is happening on the railways.

Another Higgs recommendation states that separate independent directors should be made available to shareholders so that they can raise concerns if contacts with the chairman or chief executive—who is the same person, of course—do not resolve them. That is an excellent idea that again could equally well apply to the Strategic Rail Authority.

Higgs noted that fears are still being expressed that an individual can wield too much power, which may be detrimental to a company or its shareholders. However, the power of patronage, be it financial, in terms of employment or in some other form, makes change quite difficult to achieve. The only forms of redress usually available to shareholders is to sell their shares or to form an action group. It is more difficult for quangos. One can seek redress through the National Audit Office or through judicial review, but some might say that either of those options is possibly a bit nuclear. You would not want to do that every day.

The SRA is in a position similar to that of many plcs at the moment. Apparently it is short of money, while its shareholders—its customers—in spite of their financial reliance on the authority, are becoming increasingly vocal in their complaints about its operation and management. However, they seem unable to do very much about the situation. So I want to urge the Government to set a constructive example here. It is clear that they wish to see the Higgs recommendations implemented in the private sector. I suggest that they could also be implemented, where appropriate, in the public sector. As many recommendations as are relevant and possible could

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be applied to quangos such as the SRA. I believe that the authority and other organisations like it would work much better as a result.

6.16 p.m.

Baroness Hayman: My Lords, I am grateful to my noble friend Lord Brennan for introducing the debate and to my noble friend Lord Berkeley for taking on the Higgsian spirit of widening the pool of contributions. I thought that I might be the only speaker so to do. I had begun to feel some trepidation, not to say a little regret, that I do not have a remunerated non-executive directorship to declare in speaking in the debate.

I was most taken by the comments of my noble friend about the capitalist system when he introduced the debate. He referred to the tensions between greed and trust created within the system, as well as the importance of the role of good corporate governance in seeking to resolve those tensions. Of course we live in a mixed economy, one that also has a public sector, a not-for-profit sector and a charitable sector. As my noble friend Lord Berkeley remarked, the principles of good corporate governance are just as important in those sectors as they are in the commercial sector. Indeed, Higgs recognised that in parts of his report. Furthermore, the issues of creating trust, maintaining accountability to stakeholders—who are sometimes more diverse, complex and difficult to identify than shareholders—and the difficulties of reporting and measuring success are challenging for those involved.

Here I have interests and experience to declare. Although I have not had experience as a non-executive director in the private sector, I have been a non-executive director—that is, a governor—and chair of a school governing body; the chair of an NHS trust, a unitary body with executive and non-executive members. I am now a trustee—a non-executive—of a small charity and of a non-governmental departmental public body, the Royal Botanic Gardens at Kew. Lastly, I chair a charity whose turnover amounts to a quarter of a billion pounds a year and employs some 3,000 people. The charity has real responsibilities and accountabilities and must face real issues about reporting standards, as well as real issues about its responsibilities towards donors. Thus we have to be sure that we have in place the right processes for reporting.

I have no desire to be overly prescriptive in any of the different areas of the mixed economy. Equally, however, I do not think that we should be overly Panglossian in assuming that at the moment we are doing everything right. The challenges in some of the sectors I have described—particularly in regard to the recruitment of non-executive trustees—are particularly acute. The selection, the induction and the assessment of performance of those who take on non-executive roles are very important. It is sometimes most difficult to achieve in an area where people are not paid. It is sometimes very difficult for trustee bodies to bring in those disciplines because people are giving of their time in a totally voluntary fashion.

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However, it is not impossible that they are not doing their job in the best interests of donors and the people who are meant to be the recipients of services. As government uses the voluntary sector more and more in the delivery of public services, these issues will come more and more to the fore.

I look with some interest at the ways in which Higgs can be applied. As I said, there are already new accounting standards in the charitable sector, which will be developed. Reporting standards will equally be developed. The "comply or explain" principle is perfectly appropriate. It is a counsel of despair to say, "It is a perfectly appropriate system but it will not work because the regulators will not follow it properly". It is up to everyone concerned—the Government, the organisations and the regulators—to make sure that it does work and that the explanation can be just as positive and important as the tick-box compliance, which none of us wants to see.

Perhaps I may conclude by saying a couple of words about widening the pool. Some 20 years or so ago in the public sector I had experience of widening the pool of those who became governors and those who became involved in the governance of the health service. Widening the pool—in what, for the purpose of today's debate, would seem to be the reverse way—by bringing people from the private sector into public sector administration was absolutely the right thing to do. It was enormously valuable. The people involved enriched and improved the standards of governance in many areas of public life, as they do in many areas of charitable life.

But I never heard anyone who came in and took up those roles say, in simple language, "This is a doddle compared to my real life. There are no complexities here. There are no challenges here. There are no skilled people working here. There are no talented managers working here". Quite the reverse. They were always seized by the number of constituencies, the number of stakeholders, the complexities of some of the relationships and the nuances of not having some of the ordinary, simple levers to pull or the ordinary measures of share performance, profit or whatever by which to judge performance. It is against that background that I endorse the recommendations in Higgs.

Much has been said about the difficulties of recruiting good non-executive directors. I believe that there is a pool of people in the not-for-profit, voluntary sector with the diverse backgrounds described by Higgs. I hesitate to include women as part of the "diverse background", although apparently we are meant to do so. Women have always been more in the foreground for me and I am not sure that that is the right way to look at the issue.

A conversation was related to me recently about a head-hunter who had found a candidate who completely fitted the personal specifications drawn up by the board. He put forward the woman's name and was told, "No, I am sorry. We had a woman once and it did not work". It is a sad reflection, but it is not unique.

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I hope that the recommendations in Higgs in regard to diversity and looking into the wider pool will be carried out in the spirit of improvement and meritocratic appointment, not of political correctness.

6.25 p.m.

Lord Razzall: My Lords, I join every noble Lord who has spoken in thanking the noble Lord, Lord Brennan, for introducing this important debate. I join every noble Lord who has spoken—apart from the noble Baroness, Lady Hayman—in declaring an interest: I hold the directorships stated in the Register of Members' interests. As the noble Viscount, Lord Chandos, has risen to his and my defence, I shall not intrude on private grief and further lambaste the Financial Times for its misrepresentation of his and my position on its front pages in August. I shall leave that to the noble Viscount's words, which are recorded in Hansard.

It is obvious from the polite debate that has been conducted in your Lordships' House that there is absolute fundamental disagreement between the two sides of the argument. Apart from congratulating the noble Lord, Lord Brennan, on having introduced the debate and the importance of the issue, there was not one thing said by either the noble Lord, Lord Marsh, on the one hand, or the noble Viscount, Lord Chandos, on the other, with which the other would agree. We should recognise that there is a fundamental disagreement, both in the City and in the political debate, on this extremely important issue.

I endorse the point made by the noble Viscount, Lord Chandos—more subtly than I propose to do. We have a number of chairmen and chief executives of FTSE 100 companies in this House who found the time to come and vote for a wholly appointed House—presumably on the basis, with which I agree, that their expertise would be relevant to a debate such as this. It is therefore a great pity that, with one or two notable exceptions, few of them could find the time to give us the benefit of their expertise direct. It is a great shame.

Even the background for the debate would not be agreed by the two sides of the argument. On the one side, a number of noble Lords take the position adopted by the noble Lord, Lord Marsh. They believe that Enron and WorldCom could probably never happen here and that the strength of our corporate governance provisions already in place would be sufficient. That is not a view which the noble Viscount, Lord Chandos, would necessarily share.

As to the perceived excesses of boardrooms, many years ago a Tory Prime Minister referred to the "unacceptable face of capitalism" in regard to the behaviour of the Lonrho board at that time. The view has been ably expressed by many noble Lords that most of the excesses of the past have been dealt with already and that the Higgs report is not closing the stable door after the horse has bolted but is closing a door that does not need to be shut. On the other side of the argument, a number of noble Lords believe that further steps need to be taken.

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There is a view—I know that the noble Baroness, Lady Cohen, has not been allowed into the club, and I share her view—that FTSE 100 companies have far too often appointed directors from other FTSE 100 companies who share the company's ethos, in particular in regard to boardroom pay. It is a view which some noble Lords have and others do not.

There is also the view—although one or two corporate colleagues would not necessarily share it—that if you get your friend onto the board as a non-executive director he is unlikely to move for your removal if the company is not doing well. Again, I suspect that that is a view which would split your Lordships.

I hope that when the Minister replies to the debate he will answer a number of questions in regard to the Government's position on these issues. It is all very well for us to have our different views—if we debated this subject for a further three hours, I do not think we should arrive at a consensus—but the Government are in a position to do something about it. These are my direct questions for the Minister to address in his reply.

First, does he believe that an Enron or a WorldCom could happen to one of our major FTSE 100 companies? My view is: Enron less likely, WorldCom more likely—because even with the best corporate governance structure in the world it is difficult to regulate for what was clearly a fraud. What happened at Enron related more to accounting rules. I should welcome the Government's view. Is the Minister prepared to say that the current corporate governance rules—both those that have been implemented and those that will be implemented following the Higgs report—make a situation such as at Enron or WorldCom unlikely?

Secondly—a point raised in the past by my noble friend Lord Sharman which is germane to the accounting position—is the Minister in favour of the National Audit Office being given power to audit the private sector? We understand that the NAO would like to be able to do so. It does not have the same problems as leading firms of chartered accountants as regards a potential conflict of interest in terms of consultancy income.

Thirdly, assuming that the Higgs report is implemented in full—initially for the FTSE 100 companies and thereafter for all the listed companies, down to 350 in number—where will the pool of non-executive directors come from to enable the proposals in the Higgs report to be fully implemented, particularly in the light of the increased directors' liability that directors of major companies, or indeed any company, will necessarily incur, and in the light of the trade-off between those risks and liabilities and the likely fees that will be made available to that pool of non-executive directors?

Fourthly, what position do the Government take on "comply or explain"? Do they say that if almost all companies are simply explaining and not complying they will introduce legislation? Or will they simply say that the doctrine is "comply or explain" and so long as people are explaining, it is not the Government's role

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to legislate? What will the position be from the point of view of the Stock Exchange, the ABI and new listings? It is all very well for regulations to be introduced on a "comply or explain" basis for existing companies. but what will happen to new companies? Will the insurance organisations—the ABI, for example—or the pension fund organisations start to say, "We are not prepared to accept the explanation; therefore you have to comply"? "Comply or explain" will not work in an environment in which the quasi-regulatory bodies are simply telling firms to comply.

Finally, are the Government prepared to contemplate a consideration of the idea floated by Sir Iain Vallance—an experienced former chairman of FTSE 100 companies, currently the deputy chairman of one of our major banks and a former president of the Confederation of British Industry—that company law should be amended so that, on the appointment of directors only, it is a case of "one shareholder one vote"? In other words, that, as a shareholder in a company, the noble Baroness, Lady Miller, would have exactly the same vote as would the Pru. That idea has been floated by Sir Iain Vallance. I do not know why I picked on the noble Baroness, Lady Miller. It is just habit, I think.

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