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Enterprise Bill: Clause 1 - Office of Fair Trading

30th October 2002

Mr. Jonathan Djanogly (Huntingdon): At the start of the Bill, the Office of Fair Trading is described, separately from its current constitution, as a body corporate. As such, I fully support hon. Members' suggestion that it should be subject to, and have regard for, the principles of good corporate governance.

For a listed company, it is accepted practice, as set out clearly in the combined codes of corporate governance, that the role of chief executive and chairman should be separated. The chief executive is at the coalface and the chairman has a detached role. The chairman can stand back, whereas the chief executive may not be able to do so. The chairman can review the wider picture, resolve conflicts within the board, act as a public interface and ensure a good balance of representation on the board.

Having heard hon. Members' comments, I have a sneaking suspicion that the Government wish to keep the chairman's role for themselves. As the Minister would doubtless be the first to say, that is not the intention behind the Bill, but it appears to be the implication of, for example, the Governments retaining the role of selecting the chairman. The principle of separation would certainly be enhanced by separating the roles of chairman and chief executive.

Yesterday, the Trade and Industry Committee held an inquiry into corporate governance in relation to the White Paper on the new companies legislation.

We looked carefully at corporate governance and the way in which this rapidly advancing area of regulation has moved forward. In the context of that discussion, today's debate sounds very regressive. If institutional shareholders are to make a recommendation to shareholders in circumstances in which there is no split between a company's chief executive and chairman, they will almost automatically vote against, or recommend that shareholders abstain. If that is good enough for companies, why is it not good enough for public bodies?

The Government's amendment (a) contains certain irregularities. According to subsection (a), the OFT can make up whatever guidance it wants, but despite that fact, subsection (b) implies that some note should be taken of corporate governance best practice. However, the Government are not saying that corporate governance best practice should apply in the private sector. They use the phrase Xapplicable . . . generally", which presumably could imply the same level of best practice that applies in the Post Office, for instance. Furthermore, we know that that principle will not extend to the splitting of the roles of chairman and chief executive, because the Government oppose that.

This is not an esoteric element of corporate governance; in fact, it is one of the primary elements that institutions would consider, and which the combined code deals with in the private sector. It would therefore be appropriate to head for best practice by, for instance, splitting the roles of chairman and chief executive. Moreover, if it is the Government's intention that what constitutes best practice be decided on the hoof by the OFT, they should instead adopt a more open approach and set out what constitutes best practice.

The combined code itself is not a compulsory document; it is a very fluid document, and if companies do not wish to adhere to any aspects of it, they need not do so. What they must do is to say how they derogate from best practice. Such items need to be set out in their annual accounts-a perfectly proper approach, which should be followed by the OFT. In other words, its principles of best practice and good governance should be set out, and if it derogates from them, that derogation should be explained in its annual report. In that way, people could tell whether it had moved away from best practice in a perhaps appropriate context at a given time.

If the Government are going to let the OFT go its own way and pick and choose particular elements of best practice and corporate governance, will the Minister please explain what such practice is likely to consist of? We have heard precious little about it so far, and the Government's amendment looks like a reaction to the Lords proposal rather than a clearly thought-out provision.

In considering the future of corporate governance, we should take note of Lords amendment No. 188, which states that the OFT should

"from time to time publish . . . its rules and procedures for dealing with conflicts of interest."

That is loosely worded and is-I should have thought-an acceptable way in which to proceed. If it is not acceptable, it would be appropriate for the Minister to comment on the procedure that the OFT is likely to follow when dealing with conflicts of interest for its members or those of its committees. That does not appear to have been dealt with previously.

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