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To What Extent Have the Companies Act's Objectives Been Met?

15th November 2007

Jonathan Djanogly addresses the LexisNexis Butterworths Conference on "The Companies Act 2006".

The DTI had four key objectives that were to be delivered by the Companies Act 2006:

  • To enhance shareholder engagement and a long term investment culture;
  • To ensure better regulation and a 'Think Small First' approach;
  • To make it easier to set up and run a company; and
  • To provide flexibility for the future.

The hardest questions, but ones that I received regularly during the course of the Companies Bill's progress through Parliament (when I led for the opposition team on the Bill Committee), were will this Act work and will it be good for business? To me these questions encapsulate the objectives of the Act. If they can be answered in the affirmative then the Act will have achieved its objectives. At 1,300 clauses long, covering a huge number of subject matters of varying novelty and complexity - the temptation is just to say - for the most part - yes, the Act does work and yes it is good for business. I do think it is an improvement on the 85 Act - although there are various issues where the jury is still probably out.

The Bill was designed to separate the private and public regimes and present the Act in a more user friendly way. The general feedback that I receive is that this has been accomplished - although, again, more comments are likely to come through following the recent October partial implementation. I am sure that today's conference will shed light on this issue - but I think it is fair to say that on some of the new areas, we need to wait and see, particularly where implementation is not until later. Furthermore, despite the implementation SIs being amongst the most technically challenging that I have ever seen, it would be fair to say that I have not been receiving many complaints - which would seem to point to either an effective DBERR consultation or not many understanding the SIs. That was of course until Stephen Timms MP announced on 7 November that most of the 1 October 2008 provisions will be put back to 1 October 2009. This has been poorly received by the business community.

Of course, other than facilitating home grown enterprise, the UK is undeniably now the location of choice for many international businesses. So, how is the new Act likely to affect our hard-won success? If the Act does manage to have a positive effect on our competitiveness then it will be good for business and thus, at least partly, have achieved what I feel to be a key objective. So I shall highlight some of the main issues that have arisen and some pointers for where the main pressure points are likely to be on the potential of the Act to be good for business.

Bureaucracy and Red Tape

The first point is that we will have to be very careful that the Act does not create more unnecessary red tape and bureaucracy. One feared outcome is the increase in the volume of paper which may need to be generated in relation to board minutes, for instance, evidencing that directors have properly promoted the "success of the company". These measures could make compliance with the law into more of a time-wasting tick-box approach not least because the Act does not give clarity as to how to evidence such decision making processes. Such moves would, I believe, not be well received by business.

Corporate Governance and regulation

With regard to the regulatory environment, it is important for the UK to recognise our strengths and work at maintaining them. For example, the UK's "light-touch" regulatory approach was recognised during the course of the Act as key not only to attracting international businesses to Britain but also to stopping British businesses relocating offshore. Britain is now generally seen by international investors as a more welcoming regulatory environment than the United States. During the lead up to the Companies Bill, the US passed the Sarbanes-Oxley and Patriot Acts. The wide criticisms of Sarbanes-Oxley coming out of the U.S. were helpful from our point of view in dispelling moves from the Unions and the Left to adopt a more prescriptive or "pluralist" approach to directors' duties and corporate governance in the Act.

The UK is consistently the clear leader in global corporate governance rankings and our regulatory standards are ones to which many foreign companies apply - but we need to keep in mind - that this position needs to be worked at. We need to be watchful that further regulation coming from pressures within Parliament or Brussels does not strangle or stifle innovation. There is still some cause for concern here as we wait and see how effectively the new duties of directors and the provisions relating to the Business Review work. But, for the most part, the Act recognises that the right place for corporate governance is the Combined Code for main list companies - operating on its comply or explain principles. I therefore believe that in this regard the Act is good for business but that the position may require some rigorous defence in the future.

The Companies Act originally included provisions for the now defunct Operating and Financial Review which instituted a mandatory non-financial reporting regime for listed companies. The Government proposed it, then they pulled it and then they half proposed it again and then finally amended the Business Review provisions in clause 417 only two days before the Bill's final reading and then with hardly any consultation. This I could see was no way to move ahead on promoting corporate responsibility in any sense of the term - let alone on a consensual basis. What ended up in the Act is a political fudge and requires clearer thought and policy.

I was therefore delighted when David Cameron asked me to form a Conservative Responsible Business Working Party to review this important area. And one of the basic things that this initiative is questioning is whether legislation and regulation are necessarily the best ways to institute improvements in responsible business practice? We hope to produce our report before the year end.

One of the lessons which I learnt from the shenanigans of the OFR review, was that while it was obvious that Government could retain the role of co-ordinator - promoting responsible business much more could productively come from business itself. This issue is likely to form one of the key ongoing areas of political discussion in relation to the Act as there were many on the Labour benches who wanted a more prescriptive mandatory reporting approach. We supported a more measured and voluntary approach - looking to encourage best practice rather than drive standards down to the lowest common denominator and the tick box mentality implicit in mandatory reporting. However, the Minister did announce that Government will review this issue in two years time - so it is very much a live issue. To that extent, I would hope that as voluntary corporate responsibility initiatives become increasingly widespread and more publicised, the culture of corporate responsibility, which would include voluntary reporting, will spread.

Corporations and professional practices that involve themselves in best practice CR now - will be ahead of the game - and I predict that this will become much more of an issue demanded from customers and clients in years to come. So if I leave you with a message today - can I suggest understanding and acting on CR now rather than waiting for Government imposed mandatory reporting. In practice, many elements of CR will currently be carried out, even if not articulated, by your firms and your client companies. This is because good CR is invariably linked with good business and this approach should be complimentary to the basic premise, which is under attack from the left, that a company's first duty remains to shareholders.

As I believe that to achieve its objectives the Act must be good for business I will now analyse some important themes relating to company members.

Shareholder's rights

The Act represents a significant improvement in simplifying the process of general meetings and enhancing shareholder democratic rights, for instance in relation to proxies and written resolutions. There are certain new aspects though which are yet to be tried and tested, for instance the provisions relating to the practicalities of shareholders' rights to require directors to obtain an independent report on any poll taken at a general meeting .

The question of shareholder security was not addressed in the Bill, until the Lords stages following opposition pressure, and then significant amendments were introduced mainly as a result of the activities of animal rights activists and so-called illegal share selling boiler rooms, which some of you may unfortunately have experience of. It was however decided by Parliament not to go down the route of restricting access to companies' registers of members, in an attempt to maintain the good traditions we have of shareholder transparency. The new provisions, in clauses 113-121 which came into effect in October 2007, therefore have a presumption of access - with companies then having the right to ask the court to restrict access. However, the complimentary provisions which will provide that companies will only have to notify significant shareholders in their annual return have not yet come into effect. However, under transitional arrangements, the 85 Act provisions continue to apply to requests for a copy of or to inspect a company's register of members until the company has submitted an annual return made up to a date after 30 September 2007. How these provisions will work in practice will be interesting and perhaps today's conference will provide some insight into how they are being dealt with.

I understand that this impracticality is due to Companies House needing what I calculate to be some 27 months to reset its systems. This, by the way was the same reason given as to why directors' historic home addresses could not be deleted - despite the director being allowed on to the private register. And this again is the reason for most of the delayed October 2008 implementation to 2009. Frankly, I do not see this as good enough. I return here to the key objectives - in order to meet those objectives the Act does, of course, have to work in practice.

The Government also conceded to pressure from investors and opposition parties introducing what is now Part 9 of the Act to give voting and information rights to beneficial owners of fully listed shares who are not on the shareholder register because their shares are held in the name of a nominee. We calculated at the time that over 50 per cent. of all private shareholdings were administered by nominees which corresponded to an estimated


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