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Companies Bill (Second Reading)


6th June 2006

We have had an interesting debate, although it has focused on only some 20 of the 950 clauses in the Bill.

9.14 pm

Mr. Jonathan Djanogly (Huntingdon) (Con): I welcome the Minister to her new role. I look forward to working with her in Committee over the coming weeks-

Mr. Crispin Blunt (Reigate) (Con): Months.

Mr. Djanogly: Indeed.

It was also nice to hear the former Minister make a fine contribution to our debate. I also declare my interests as they appear in the Register of Members' Interests.

We have had an interesting debate, although it has focused on only some 20 of the 950 clauses in the Bill. I start by recognising that it is more than 20 years since the last major change to the company law framework. We are pleased, therefore, that after eight years of wide consultation, we now have the Bill. Consideration started in the other place, and I recognise that the 1,600 amendments considered to date have changed and improved the Bill dramatically. I join my hon. Friend the Member for Rutland and Melton (Mr. Duncan) in recognising the heroic efforts made in the other place by Lord Hodgson, Baroness Noakes, Lord Freeman and many others.

My hon. Friend the Member for Grantham and Stamford (Mr. Davies) gave a good summary of the criteria against which the Bill should be judged, focusing on the need to create a steady framework for companies. I agree with him that, for most of the Bill's 950 clauses, it nearly reaches that objective. We also agree that the language of the Bill has been significantly improved, compared with the Companies Act 1985, which it replaces. Furthermore, we welcome the fact that the focus of the Bill is now on the private company with any further requirements being subsequently set out for public companies, rather than the other way round as it is done at present. It is right to think small first, considering the relatively few public companies.

As my hon. Friend the Member for Hornchurch (James Brokenshire) pointed out in his wide-ranging and interesting speech, in which he demonstrated his technical expertise on the issue, we welcome the fact that the Government have listened to us and now propose to include in the Bill most of the existing Companies Act 1985, thus producing one single consolidated Act. I have no doubt that that will be warmly received by business and advisers alike, but with some caution by Committee members who will have a Bill of some 1,300 clauses to consider-possibly the largest ever.

Given the huge expansion of the Bill, the Government's insistence on a programme motion is not welcome. The single day for Report, instead of the four provided in the Lords, seems unwise, considering the likely consultations that will need to be finalised over the summer.

The protection of directors and shareholders from violence and intimidation arising out of their involvement with companies is a key issue that the Conservative party has been asking the Government to address for several years. The disgusting behaviour shown towards my constituents at Huntingdon Life Sciences and the intimidation of the company's shareholders have long given me the belief that the Government have to do more, including changing the law. Through amendments in the other place, the Government have gone some way towards heeding our calls. However, it is an example of the knee-jerk nature of much of what the Government do that it took the intimidation of GlaxoSmithKline shareholders to kick them into action. Reactive law can often be the worst law, as we all know. As my hon. Friend explained, we shall use the Committee stage to probe the Government's proposals, to compare them with alternative suggestions and to tighten up their effectiveness where necessary.

Let no one be in any doubt that for the Conservative party this issue extends beyond animal testing to the need to protect the secure environment that is so vital for all our companies in all sectors of operation. In any age in which more than half of shares are owned by nominees, we have given much thought to the rights of owners of shares, as well as the obligations owed by institutions to their investors-all in the context of our support for extending shareholder democracy and encouraging active involvement in general meetings. Our aspiration and ideal is active membership from the bottom up, rather than Government regulation from the top down. In that context, we welcome the changes to the Bill made by our noble Friends in the other place to enable beneficial owners to opt into receiving company documents and votes. The hon. Member for Islington, South and Finsbury (Emily Thornberry) made a strong case for that, as did the hon. Member for Kingston and Surbiton (Mr. Davey).

That is a new concept, at least in this country. We have listened carefully to business representatives in recent days, and we accept that the details of the proposals made by our noble Friends will need some refining. We look forward to working with the Government on this matter, given that Ministers today seem at least to have accepted the concept. We also strongly support the proposal that institutions should publish how they have voted on their share investments, and we commend the half dozen or so institutions that now do so on a voluntary basis.

My hon. Friend the Member for Grantham and Stamford called for institutions to become active and to vote, and he was spot on. We found the Government's threat of compulsion to be cack-handed and over regulatory. That is why, in the other place, we removed the relevant clause from in the Bill. However, we agree that this is an important area, and one in which we would like to find a compromise with the Government. Accordingly, we intend to table amendments that would require institutions to publish whether, rather than how, they voted. We feel that that could be a good starting point for discussions aimed at encouraging shareholder activism in a way that is not heavy handed. We agree with the Liberal Democrats that we need to look very carefully at the mechanics of the issue.

With a Bill of this size, we must take account of the context. For the most part, its clauses are conceptually sound, and our work in Committee will be of a technical nature. However, significant elements of the Bill will complicate company law further, rather than make it more flexible. The review of accounting provisions is certainly timely, although I am not sure that I totally agree with the hon. Member for Great Grimsby (Mr. Mitchell), who asserted that lower audit standards necessarily lead to looser business ethics.

The Minister will correct me if I am wrong, but as far as I am aware the Bill contains no provisions to reduce audit standards. My hon. Friend the Member for Putney (Justine Greening) gave us some expert and welcome input in that regard. She used her expertise to give us some very pertinent observations about the business review, and made some excellent remarks on the vital importance of companies' internal processes. She also spoke about auditors' liability limitation, and we look forward to further contributions from her in Committee.

Government new clause 22 is interesting. The Government like to talk about shareholder democracy, but the clause will allow company members to entrench provisions in their company's articles. As drafted, the Bill therefore runs contrary to the concept of shareholder democracy. For instance, company directors with enough shares will be able to entrench their right to have a-possibly large-salary.

It is interesting and somewhat bizarre to note that the Labour party in opposition liked to attack what it called "corporate fat cats". In government, it seems to want to introduce laws that will allow those people to entrench their right to get fatter. In Committee, we hope to address that matter and redress the balance in favour of shareholder votes.

We will also wish to reassess the role of the company secretary. My hon. Friend the Member for Eddisbury (Mr. O'Brien) made a very convincing case that proper recognition should be given to what is a very important officer role in a company. Company secretaries are especially important in larger companies, whether public or private. We also intend to look carefully in Committee at the proposed use of criminal sanctions by the takeover panel.

The question of directors' duties featured strongly in the debate. Clause 158 in part 10 of the Bill is intended to codify a limited number of existing common-law principles relating to the responsibilities of directors. That has led to vociferous and growing complaints from across the legal and business communities. As my hon. Friend the Member for Clwyd, West (Mr. Jones) skilfully demonstrated in an excellent contribution, historically judges have had the discretion to deal with complicated issues relating to directors' duties on a case-by-case basis. That system has been adaptable and effective in dealing with cases that are often complicated and highly technical. A flexible system is at risk of being replaced by Labour with an inflexible tick-box one.

The Government's position has been inconsistent. They have said that there will be no change in the common law position yet they talk about introducing the concept of enlightened shareholder value. If nothing is to change, the Government need to explain what they mean by enlightened shareholder value. That will be a theme in Committee.

The Law Society doubts the level of anticipated savings for business from the Bill. On the contrary, it believes that the new provisions on directors' duties will result in new uncertainty, increased legal costs and additional bureaucracy. It seems clear to us that, while the Government protest that they are holding some kind of middle ground, as the Secretary of State suggested, and are not changing the common law position, in fact they are doing exactly that. Such a course can only lead to confusion where there should be clarity. We shall support the position of our noble Friends and the Law Society that a non-statutory guide to directors' duties is the way forward, not wishy-washy confusing platitudes that seek to show concern but will probably do little other than confuse.

A May Financial Times lead article entitled "A Missed Opportunity" said:

"The stated aim was to make directors' duties clearer and more up-to-date. The reality is a confused list that mixes platitudes with necessary duties...the government's approach betrays an underlying mistrust of business."

We say that company law exists to provide a stable framework in which companies can operate. Part 10 of the Bill does not do that. It bases law on fashion, not reason. That is an issue that we will address in Committee.

A major concern of hon. Members in today's debate has been that the Bill should enable company law to become the arena for a number of interest groups to further their causes. Corporate social responsibility is now taken more or less seriously by all larger companies based in this country. There is general agreement, which we certainly share, that it is only good business for companies to do so. The Conservative party places high value on the issue. We strongly support action taken towards social responsibility by companies and we believe that companies, sometimes more than Government, can be a positive driver of environmental and social change.

The hon. Member for Richmond Park (Susan Kramer) made an important point when she said that the Government spent too little time recognising and encouraging good corporate social responsibility practice when they found it. That is not a lesson lost on the Conservative party. The question is whether the Bill is the place to advance CSR. That will be an important theme for the Committee.

Mr. Michael Wills (North Swindon) (Lab): I have been listening to the hon. Gentleman's case with great care. If he thinks that the Bill is not the place to enhance corporate social responsibility, where is the place?

Mr. Djanogly: I have just explained that I see the primary way of advancing CSR as being through companies voluntarily putting measures in place. However, there are other ways in which it should be encouraged. The hon. Member for Gower (Mr. Caton) mentioned the OECD. That is certainly an international context in which CSR should be advanced.

Mr. Duncan: The hon. Member for North Swindon (Mr. Wills) has only just come in.

Mr. Djanogly: Yes. If the hon. Member for North Swindon (Mr. Wills) had heard some of the debate, he might have been a bit wiser.

One of the problems that we have is that the amendments mean that burdens will be placed on company directors of all UK companies-the corner shop as much as the multinational. We shall argue that that will not just lead to uncertainty and the fear of litigation, but will set back the agenda of engagement in corporate social responsibility that our party supports. That point was made elegantly by the right hon. Member for Cardiff, South and Penarth (Alun Michael). The hon. Members for Richmond Park, for Kingston and Surbiton, for Portsmouth, North (Sarah McCarthy-Fry), for Caernarfon (Hywel Williams), for Gower, for Great Grimsby, and for Islington, South and Finsbury, and my right hon. Friend the Member for Suffolk, Coastal (Mr. Gummer), in their own ways and often elegantly, made their cases for more regulation on business and mandatory reporting in the name of corporate social responsibility-many different forms of corporate social responsibility, I hasten to add.

Although some of the causes that were mentioned were certainly appealing, the recipe for dealing with those issues was much less so. I appreciate that this is a significant and important area and I foresee that we will spend some time on it in Committee. Let me just give hon. Members one example now. Most of the campaigns involving international development or environmental issues will probably involve large multinational companies and most of those companies will probably be foreign. Some hon. Members may have overlooked the fact that the Bill applies only to UK companies. Quite apart from the merits of the campaigns involved, is this the place to deal with those issues? We will suggest that it is not.

Mr. Gummer: I have great sympathy with what my hon. Friend is saying, but surely the situation is rather different. It would be possible for us to produce a mix of sensible legislation that would not be overburdening, but which would show quite clearly that we were taking the lead. This country ought to take the lead. The idea that we are not doing that because other countries will not do it is surely not suitable. Climate change and its environmental results are too urgent for us not to take the lead. I hope that he will find ways in which we can do that.

Mr. Djanogly: I totally agree with my right hon. Friend. This country should take the lead. He explained earlier how the Government are not taking the lead in the way that they should be. I thought that he made an excellent contribution. It is important to point out that companies in this country are leading the world on corporate social responsibility. As we discussed earlier, the Government are not paying enough attention to the good that exists. Encouraging that good has not been a priority in the way that it should be or that it would be under a Conservative Government.

Mr. Davey: Will the hon. Gentleman make it clear to the House whether, tonight, Conservative Front-Bench Members are in favour of operating and financial reviews being put into the Bill-as they were-or not?

Mr. Djanogly: I will -[ Interruption. ] The question is quite simple. Essentially, we feel that, following the huge mess and the total shambles of what the Government created in relation to the OFR-as the hon. Gentleman explained in his speech and as my right hon. Friend the Member for Suffolk, Coastal also explained very well in his speech-when it comes to the question of the business review, although the Government stumbled into it blindly, we would say that what is now in the Bill is roughly in the right position, subject to review in Committee.

Mr. Davey: I think that that was clear. My interpretation of what the hon. Gentleman has said is that he is no longer in favour of the OFR as it was originally put in the Bill and is happy with the Government's compromise. Is that his position?

Mr. Djanogly: The hon. Gentleman starts from the wrong point- [Laughter.] He does. As my hon. Friend the Member for Eddisbury pointed out, the stance of the Conservative party was against the OFR from day one. The premise of the comments of the hon. Member for Kingston and Surbiton is thus wrong.

Mr. Davey rose-

Mr. Djanogly: The hon. Gentleman has made his point, but I will give way one more time.

Mr. Davey: I thought it was important that the hon. Gentleman allowed me to intervene one more time, because on 16 March, in the Eleventh Standing Committee on Delegated Legislation, which considered the Government's measure to repeal the OFR, he voted with the Liberal Democrats to try to oppose the repeal. Has his position shifted since 16 March?

Mr. Djanogly: The hon. Gentleman totally misconstrues what Conservative Members did in that Committee. As the record will show, we were voting against the total mess of a process produced by the Government on the OFR-and he knows it. He got it wrong from the start and in the middle, and now he has got it wrong again at the end. We will proceed from the position of what is right for British business.

When the proposed directors' duties provisions are added to the provisions on derivative claims and the new business review reporting arrangements, all of which, admittedly, were improved in the Lords Committee, we must still listen to those who say that the Bill could increase the possible liabilities for company directors. We will wish to review the matter in Committee.

There is a growing fear in the business community and among Conservative Members that if the regulatory environment is made too harsh and the fear of litigation becomes too great, the best people will not wish to be company directors in the UK and many of our companies will repatriate or re-list overseas. The stakes are high, and we will keep that in mind throughout the passage of the Bill.

9.37 pm



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