§ Order for Second Reading read.
§ 3.4 p.m.
§ Sir Brandon Rhys Williams (Kensington, South)
I beg to move, That the Bill be now read a Second time.
I should like to begin by adding my warmest congratulations to my hon. Friend the Member for Honiton (Mr. Emery) on his promotion to the Front Bench. I have often criticised the experts who have only learned about industry from books; but my hon. Friend is one of the relatively few Members of the House who have learned about industry from personal participation in management. I feel certain that this will ensure that his appointment is as warmly welcomed in industry as it is in all parts of the House.
However, I wish to express two regrets. The first is that my Bill, coming very closely after the one we have just dealt with, will deprive my hon. Friend of his lunch. I hope he will not end by making a meal of my Bill. My other regret is that my hon. Friend's promotion is likely to weaken our delegations in Strasbourg and at W.E.U. However, my hon. Friend will have many new opportunities of showing himself to be a good European in his new appointment. We wish him every possible success.
I am returning to one of my favourite themes. It concerns the problems of the joint stock company and the need for reform. In 1969 I introduced a Bill under the Ten Minute Rule on this subject. Its object was virtually identical to that of the present Bill, but I was tackling the problem in a different way. My intention in that Bill was to introduce into statute law the expression "management audit" and to give facilities to shareholders who felt so disposed to insist that a management audit should be instituted under the general supervision of a shareholders' commit- 1648 tee. That Bill was read a Second time and completed its Committee stage in this House. However, by the end of its Committee stage it had become a more complicated Measure than I would have wished it to be.
Therefore in reverting to this subject last year I tried to devise a simpler method of attaining my object. The Bill that I introduced last June, again under the Ten Minute Rule, was virtually identical to the present one. In reintroducing it I have made some small drafting improvements. There is one other change which students of politics and company law may notice, though I shall not mention it now for fear of embarrassing an hon. Member who is present in the Chamber. It can be detected by serious students of the texts.
The present Bill enjoys all-party support and among the distinguished right hon. and hon. Members who were kind enough to add their signatures to it when I explained the nature and intention of the Bill are two formers Ministers at the Board of Trade.
Before completing my preliminary remarks, I wish to convey my thanks for the assistance I have had from members of the Department—acting, of course, purely in an advisory capacity and in no way committing the Department to my Bill. Their assistance has been invaluable. If the Bill has the makings of a professional job it is due to their advice and not to my drafting skill.
In the Bill there are only two essential provisions. The first is that large quoted companies—those with £5 million total net assets or employing more than 1,500 workers—must have at least three outside or non-executive directors. This provision is designed to catch the thousand largest companies operating in Great Britain. In Sir Walter Puckey's excellent book "The Board Room" I read that it is now a provision of the New York Stock Exchange that a quotation is not given to a company unless it has at least two outside directors. As a result, nine out of ten companies quoted on the New York Stock Exchange have at least two non-executive directors. I have suggested that there should be three. The number is not significant. I hope, however, to ensure that there is a significant element of outside direction in all our largest public companies.
1649 The other main provision of the Bill is that the non-executive directors must prepare an annual report to be attached to the balance sheet—that is, to be issued annually to the shareholders. The remaining provisions of the Bill are purely subsidiary or interpretive and are not of great significance.
It is useful for the House to consider precisely what is the nature of the problem to be solved. I consider that it is the maintenance of efficiency in joint stock companies and the correction of any decline in efficiency at the earliest possible stage. The difficulties which I believe joint-stock companies are experiencing in the latter half of the twentieth century arise from a number of causes. One of them is the ever greater complexity of modern business and technology. Another is the huge number of public companies. There is the wider extension of share ownership. None of these is necessarily a tendency with which I do not agree, but their effect must be taken note of. We must recognise the strains which they place upon the joint-stock company as a mechanism for the creation of wealth.
I would like to draw attention too to what is loosely called the managerial revolution. In our largest companies we have now seen virtually the end of the owner-manager. We have also seen virtually the end of what I might call the "Forsyte Saga" type of board where men of considerable business ability, no doubt, would hold a range of directorships in companies which they did not manage and whose boards they joined for purely supervisory purposes.
Before the war, and in some cases even since the war, it was commonplace for the boards of British companies to consist mainly, if not entirely, of notabilities who might bring business acumen and reputation to the service of the company but who did not engage full-time in its management. This situation has largely come to an end; and it is common, if not absolutely universal, for the great majority of the directors of great joint-stock companies to be men who are fully engaged in the business. Many of them probably have worked their way up within the very same business from the start of their career.
I consider that all these factors are working to make it increasingly difficult 1650 for shareholders to exercise effective supervision of the joint-stock company. A remedy to this situation must be found urgently.
In passing, as it is one of my hobbyhorses, although it always creates a somewhat sulphurous atmosphere with my hon. Friends, I may say that I blame the Government for their lack of action on the question of transferability of pension rights. If the full-time executives of our businesses were able to plan their own careers without the fear of losing their pension rights on changing employment, much greater efficiency would be engendered by the executives being free to exert pressure by what one might call "voting with their feet". I implore the Government to bear in mind the urgency, particularly when a serious shake-out of management is occurring, of acting to ensure that there is full transferability of pension rights throughout the private sector. Great strides have been made in this regard in the public sector; but private companies still suffer from the restriction on mobility of pension rights, which inhibits executives from making the best use of their capacity.
What, then, are the forces that are working for greater efficiency in a joint-stock company? Are they enough? Or can we expect that they will do all that is necessary in the near future?
We must pay tribute to the Press. In recent years the Press has emerged as a most important factor serving shareholders, the general public and, indeed the Government by exerting an important and effective pressure on boardrooms to improve their performance. Press coverage has changed out of all recognition in recent years in both quantity and quality. However, I cannot believe that members of the Press, who essentially are outsiders, are able to do all that is necessary to correct the problems of the joint stock company.
Next, particularly since the war, the takeover bidder, prowling around looking for inefficient managements sitting on top of assets of which they are not making the best use, has made a certain contribution, at any rate, to the elimination of the unfit. But a takeover bidder is not a company doctor. He is an executioner. All too often it is the people who are most in need of improving their performance who have no realisation of the fact 1651 that they are sitting targets for a takeover. The spate of takeovers and mergers which have taken place in the last five or 10 years has not always proved to be the most effective way of maximising the profitability of the assets or, indeed, protecting the interests of the shareholders in the long run.
Some hon. Members—who seem to me to have learned more about industry out of books than from practical experience and I am ashamed to say that they are to be found on both sides of the House—place a great deal of reliance on the forces of competition to create efficiency. I can only say that in my own experience some monopolies can be outstandingly efficient; and that competition often causes waste, nervousness and the elimination of the most promising firms in an industry. Competition, too, is never likely to be tried in the Ricardian sense. It is always bound to be an imperfect force. I cannot anticipate that in this country, even if we join the Common Market, the forces of competition alone will be sufficient to bring about the improvement in the general climate of British industry which we would all like to see.
I wish to dwell for a moment on the rôle of the institutions—the unit trusts, the investment trusts, the pension funds, insurance companies and the banks. Undoubtedly it has become recognised by the men responsible for handling the enormous funds available for investment by these institutions that they have a responsibility to exert pressure on management for greater efficiency. I found a speech made by Lord Keynes as far back as 1928, as chairman of one of the great insurance companies in those days, in which he implored the institutions to take a more active part in promoting efficiency and supporting enterprise in this country. I will not weary the House by repeating in full the remarks which he made, but they are so totally germane to what we are discussing and to the general problem of the joint stock company that I strongly commend any hon. Member who is interested to look them through. I reprinted them in an article, and I shall be happy to supply a copy to anyone who is interested. The thoughts of that great man on this problem are so relevant that they should receive greater attention.
1652 The institutions seem to me to be hampered by a considerable number of restraints to which I shall come in a moment. The other force which is operating for the efficiency of private enterprise is Government pressure of all kinds. The Government exercise pressure through purchase policy, through monopolies legislation, through the way in which they influence public investment and the conduct of the nationalised industries, and they may achieve great things, as we hope they will, through the Industrial Development Executive which has just been announced. But it seems to me that when all is said and done, when all these pressures have been exerted, we still have between £40,000 million and £50,000 million worth of assets under the supervision of joint stock companies. At least 2,000 British firms are quoted daily in the Financial Times, and there are many other public companies whose shares are regularly traded in London. I cannot believe that we shall be able to restore efficiency to all these very many large concerns unless any troubles from which they may be suffering are cured from the inside. That is the object of my Bill.
It has been suggested that the institutions and the shareholders can exercise all the pressure necessary on management, if they lose heart and feel that management is not doing its best, by selling their shares, by not buying them or by not subscribing to new issues and thereby bringing about a fall in the share price, which undoubtedly has a certain effect on management. My first comment about that is that over recent years such pressures have evidently not been enough; otherwise, the performance of the private sector of the British economy would not be causing us so much concern.
Moreover, shareholders will only act in these ways when information has reached them on which they are able to form an opinion; but it is essential to get at the problem long before it becomes common knowledge, or even before certain well informed or shrewd individuals have an inkling that there is trouble. The joint stock company must have its own correction system for management and must not depend on forces outside.
I would like now to return to the rôle of the institutions. Among the reasons why I feel that they are not able to act as effectively as they might or, indeed, as they would wish is, first, that they 1653 cannot carry the number of sufficiently expert staff to understand the inside problems of the entire range of companies in which they hold shares. It is common for a large unit trust, investment trust or in particular, a big insurance company with a very wide spread of shares to hold an interest in scores or even hundreds of companies.
These institutions are in competition with one another. However much they may be dedicated to the idea of efficiency in British private enterprise, they cannot carry the staff of 20, 30 or, perhaps, 50 or more experts who would represent the bare minimum necessary to give them effective up-to-date professional advice on the whole range of industries and commercial activities engaged in by the companies in which they hold shares.
Moreover, even if a great institution or merchant bank were to decide that it was in its long-term interest to have a reputation for excellence and expertise in these matters, it could not insist on access to the necessary confidential information. Or, if it were in a position to do so, as, I suppose, some of our great City institutions are, it would become a privileged shareholder with access to knowledge not available to the general run of private shareholders.
I regard it as an unwelcome development that the private shareholder is dying out or becoming a less significant force in the whole field of investment. I do not myself hold any shares in any public company, so I may declare my total lack of direct personal interest in the subject which I am discussing. But each one of us in this country, whether a shareholder or not, has a stake in the success of our industry and business; so we are all interested parties.
I have detected certain tendencies in City institutions to feel that the existing facilities which they have for contacts and exchange of information with company managements give them all that they require if they wish to exert discreet pressures on a company which they feel is not performing as well as it might. But I know of no case in which there has not been at least the danger that inside information would be obtained which, sooner or later, would influence the institution in its attitude to the purchase or sale of shares in a way which would not be open to other shareholders.
1654 Institutions, for special reasons, may not wish to exert pressure on certain companies. They might have relations with them in other ways. Or perhaps, if they began to exert pressure, it would upset the share price. One can think of many reasons why institutions, even in full knowledge of the development of a problem situation, might find themselves stuck and unable to act. I am sure it is not necessary to remind the House of a particularly serious case in which the institutions with big holdings found themselves locked in and able only to wring their hands in despair.
The Government cannot remedy the situation over the whole field, however much they may wish to do so by direct or even by indirect action.
Hon. Members have been deeply interested and concerned by the V. and G. case; I think that the rather unsatisfactory tribunal report on that case has at least shown that we are putting inordinate pressures on civil servants and asking them to make bricks without straw. The findings of that inquiry will serve a useful purpose if they awaken the conscience of the House to recognise that we have been placing pressures on the worthy and, in many cases, brilliant staff of the Department of Trade and Industry and asking them to do the impossible. I deeply regret that anyone's name should have been mentioned in a critical sense in the tribunal's report, because he was not able to do what he should never have been asked to do in the first place. But if we were to give the Department of Trade and Industry the necessary powers and knowledge to investigate and control the whole range of joint stock companies we would then have handed over completely to State control in a way in which I do not think even the most fanatical nationaliser would think practical or even desirable.
We therefore need an extension of the principle of the audit. If there are some who do not like the expression "management audit" let us fall back on some other expression, perhaps "the supervisory report". The important thing is that the joint stock company should now move a further stage forward in its evolution. It must again have the ability to put its own house in order.
Since the Bill which I introduced in 1971 was published, a number of objections have been raised by professional 1655 institutions, by experts and by many others who have corresponded with me or in the Press. I am glad to have succeeded in attracting professional attention to the deficiencies of the present situation and I am grateful to those who have pointed out ways of improving my Bill. I would like to take this opportunity of answering as briefly as I can what seem to me the most serious of the possible objections to action being taken along the lines I suggest.
The first objection I have heard is that it is not right to proceed by legislation because the only trouble with management today is that there is too much Government interference. My answer is that we do not have the time to wait for organic change in the joint-stock company. The Government should recognise the existence of a real problem, and it is not inappropriate for minor measures to be taken which will assist the changes which are probably already taking place.
I suppose there must have been precisely the same kind of arguments a hundred years ago when it was first suggested that it would be desirable for the shareholders to be protected by an outside auditor. One could argue against the use of outside auditors in the same way as one could argue against the use of a management auditor or the employment of consultants. But these arguments do not have any force. These people are brought in and paid by the company to be part of the company, serving a useful purpose within it. They are not destroying it, not creating havoc or damaging the shareholders' interests, but quite the reverse. The Bill leaves it entirely to the company, the shareholders—institutional or private—and the directors to work out their own salvation by the arrangements they make without anyone from the Ministry telling them what they should be doing.
What I am suggesting will be recognised as a move towards the European pattern, towards the creation of an Aufsichtsrat as it is called in Germany, which is a separate supervisory board. The performance of the German economy since the war does not suggest that the presence in German company law of the obligation on all large firms to have a separate supervisory board remote from 1656 the executive management of the company—which they call the Vorstand—has been so very damaging.
Another objection is that the Bill would result in boardroom controversies and splits. In the great majority of cases it would not. There would be harmony in the board when the outside directors have no reason to see any serious grounds for complaint about the way in which the management is conducting the business. They would then probably be happy to have the company secretary draft their report for them, and be willing to sign it. It would differ little in essence from the directors' report which will be prepared anyway each year. But where they begin to feel that a personality or asset was not being made the best use of, it would be good to have controversy in the board. What we need to escape from is the unanimity of the graveyard in company management. Splits, if they occurred, would tend to resolve themselves inside the board in the vast majority of cases, because naturally if a split came out into the open it would have serious consequences for the company—just as there would be serious consequences for the company if there were a dispute with the auditors which came out into the open in the form of qualification of the auditors' report on the accounts.
So the fact that the outside directors would be obliged to make a separate report to the shareholders would mean in practice that the status of the non-executive directors within the boardroom would be significantly enhanced. That seems to me a worthy objective.
Moreover, if the board did divide into a supervisory and an executive board it would not matter. People who have studied the German system and found fault with it are concerned generally about the provision for worker participation on the supervisory board. That is an entirely different matter, and my Bill makes no reference to it. Right hon. and hon. Members who feel strongly about it should introduce their own Bills on the subject.
The Bill does not introduce a new kind of director, because the non-executve director already exists. All that the Bill does is to make certain that the non-executive director has status, that he exercises his functions and can be seen 1657 by the shareholders to be doing so. If he fails to exercise a useful function, the shareholders will be able to make changes—if that seems to them the right thing to do.
Another serious suggestion is that it it is better to help shareholders by wider disclosure. The 1967 Act introduced much wider provisions for disclosure, and it is conceivable that it would be profitable to go even further down that road. But as a way of correcting the problems of inefficiency in joint stock companies at an early stage, I would say that wider disclosure has its weaknesses. First, the existing extent of disclosure has proved vexatious for smaller firms. Many right hon. and hon. Members would be prepared to see some of the demands for disclosure reduced again in the next Companies Act.
Moreover, no amount of disclosure that could be enforced on a joint stock company by Statute could ever reveal the whole story. In some years of industrial consultancy and personnel selection experience, I have time and again found that when one was able to begin to have long, serious, confidential discussions with senior and middle management the situation within the company was totally different from what one had assumed it to be before, even after extremely careful study of all the published data. And even if shareholders were enabled to ask for any information they wanted, I do not think their contributions towards the solution of the problem would necessarily be very well-advised. Wider disclosure seems much more likely to suggest the nature of the problem than the nature of the solution.
Looking back on what I learnt in over 13 years with I.C.I., I remember particularly the advice of a well respected works manager who used to tell his juniors "Do not come to me with your problems. Come to me with your solutions." He knew the problems. What he wanted to know from them was how they should be tackled. Wider disclosure will let the Press, the shareholders and the competition know—perhaps—whalt is going on. It may suggest the nature of the difficulties which the board is trying to contend with; but will it help the board to solve those problems? My feeling is that it is only likely to add 1658 to the difficulties of the company and its management.
It has been suggested that people in this country do not exist who are capable of doing the work of a management audit. This is absolute twaddle. In this Bill one is asking for only about 3,000 people at the most. Since I do not envisage that it would be necessary for non-executive directors to hold only one such post, the Bill would probably require a cohort of only about 1,000 management auditors. I do not believe that the resources of commerce, industry and the City cannot find 1,000 people capable of carrying out this work. In so far as they would have to learn the job by doing it, it is true that we are at the beginning of a new profession. But the concept of outside auditing appeared in company law only about 100 years ago, and it first became compulsory as recently as 1900. It was only in 1948—many people are surprised to hear this—that it became statutory that an outside auditor should be professionally qualified. So the profession of auditing has taken 100 years to evolve, and, obviously, the extension of auditing into management auditing will take some time. That is no reason why we should not start this year.
Some people, including Aims of Industry—sometimes when reading its publications I think that one of its aims must be suicide—have argued that it is impossible to proceed without a full-scale reform of company law and that small measures should not be undertaken meanwhile. I have seen it suggested that there should be a Royal Commission or at least some much fuller study before anything is done. This is what I call the Greek kalends ploy, which comes often with warm assurances of support for what one is aiming at, but with shakings of the head that anyone on the back benches should be so ill-advised as actually to recommend that something specific should be done. In defence of my Bill, I would point out that, in effect, it is only a very small step, but it is a step in the right direction.
There are some small remaining points, really constituting Committee points. I hope that if the Bill secures a Second Reading it will be possible for me to introduce Amendments which will deal with them.
1659 As regards the remuneration of non-executive directors, I think it would not be inappropriate for companies to pay them £3,000 or £5,000 at least. I hope, too, that these directors would not hold more than three or five such jobs at the most. It has been pointed out that the Bill is not sufficiently specific in saying how the shareholders are to decide the remuneration of outside directors on their first appointment. This needs attending to.
There has also been criticism of the definition in Clause 2 of "non-executive director". I suggested that he should work for the company in an executive capacity for not more than 100 hours. I agree that that provision could be improved. Possibly it would be better to suggest that any service that the non-executive director performs on behalf of the company in an executive capacity must be reported to the shareholders at the next annual general meeting.
I come to the nature of the non-executive director's report. I found what I thought was about the widest possible definition one could make—namely, that it must concern itself with the management of the company and the use of the company's assets. Even that may not be sufficiently wide. I meant that it must deal with the people and with the things. If any hon. Member would like to suggest a definition which would go wider or improve on that, I would be happy to adopt it.
If the Bill does not complete its stages, there is nothing to prevent shareholders from requiring their boards to implement its provisions in advance of general legislation. I hope they will. I believe that sooner or later they must do so if the joint stock company is to survive.
§ 3.41 p.m.
§ The Under-Secretary of State for Trade and Industry (Mr. Peter Emery)
I intervene now not in any way to stop the debate but to give the Government's view of the Bill. The aim of the Bill is to promote the efficient management of large companies, and it is clearly one with which everyone would agree. To that end I thank and congratulate my hon. Friend the Member for Kensington, South (Sir B. Rhys Williams) for drawing attention to one way in which this improvement can be achieved.
1660 From the start I make it clear that, while the Government fully understand there is room—in some instances major room—for improvement in British management, in no way should it be taken that this Bill is an attack overall on British management, which bears such a massive burden in running industry and exporting throughout the world. Too often attacks are made upon management, and I want to make that point plain now.
The Bill requires very large companies to appoint to their boards at least three non-executive directors. It is a slight revision of the Bill which my hon. Friend introduced in June, 1971. These non-executive directors would have the duty of preparing an annual report on the management of the company and the use of its assets. Their report would be laid before the company in general meetings with the report and accounts of the ordinary directors.
There is wide recognition of the fact that in a large company shareholders may be unwilling to involve themselves in the trouble and expense of exercising their power over the directors either by refusing to accept nominations to the board or by dismissing the directors. The Bill seeks to deal with this problem, at least partially, by providing the shareholders with a report made not by the executive directors but about their performance. The provisions of the Bill could well divide a board with one part reporting on the other. I believe this to be a major problem which has not, perhaps, been thought out to the full. It is at least arguable that this is not the way to promote co-operation between all members of the board so that they work together in the interests of the company.
§ Sir B. Rhys Williams
Does not the appointment of auditors have very much the same effect? Can my hon. Friend instance any large company where auditors are so at loggerheads with the board that the management has been brought to a standstill?
§ Mr. Emery
My hon. Friend has not clearly seen my point. Auditors are not sitting at monthly board meetings with other directors. They do not have the executive power or the responsibilities of an ordinary director. The point I make is real. While the Bill is in many ways 1661 admirable, it is only one way of correcting the situation.
That is shown clearly by the appointment last month by the C.B.I., in collaboration with the City and other institutions, of a committee on company affairs under the chairmanship of Lord Watkins on. Its terms of reference include examiningthe factors which might be expected to assist the direction and control of public companies and corporations.To examine the role, responsibilities and structure of the boards of public companies and corporations.To consider corporate behaviour towards interests other than those of the shareholders and providers of finance, including employees, creditors, customers and the community at large.I shall not quote the other terms of reference, but those which I have mentioned specifically apply to the matters covered by the Bill. The setting up of this committee shows that there is not general agreement on how best to achieve my hon. Friend's aims. In the Government's view, it would be premature to legislate on this wide subject at this stage on the lines proposed in the Bill before the C.B.I. committee has reported.
I greatly hope that this debate and the presentation of the Bill will provide a general background to encourage fuller discussion of this type of problem. I have recently had to resign as Chairman of the Consultative Council of Professional Management Organisations and I know only too well that there is concern about this matter. The type of publicity that my hon. Friend is giving to the subject is extremely useful and I know he will not take it amiss if I urge him to do whatever he can to co-operate with the C.B.I. committee—I hope, to provide evidence for it.
The committee will be able to cover widely all the matters on which my hon. Friend has put his finger. These issues deserve much more discussion than this short debate. In the Government's view, further consideration has to be given to the structure of company boards before any one concept or structure is imposed in company law. It is the view of the Government that it would be difficult to make Amendments to the Bill in Committee and probably impossible to make Amendments to cover the matters which I have mentioned.
1662 I hope that the debate will have been the start of what will prove to be for a long time to come greater attention to the structure and direction of boards of management in British industry. By that I do not mean that there should not be any action for a long time, but even after action has been taken it will still be important to keep the matter under review and to ensure that we obtain the greatest degree of efficiency from management, just as we expect to obtain the greatest degree of efficiency from plant, workers and the whole structure of British industry.
I thank my hon. Friend for introducing the Bill and for speaking as he has, and I hope he will not regard what I have said as being too destuctive.
§ 3.49 p.m.
§ Mr. Hugh Dykes (Harrow, East)
Between the remarks of my hon. Friend the Under-Secretary and the spirit and content of the remarks of my hon. Friend the Member for Kensington, South (Sir B. Rhys Williams) in presenting his Bill I suppose I am in an intermediate stratum. I would add my congratulations to those which my hon. Friend the Under-Secretary has given to my hon. Friend the Member for Kensington, South for devising his Bill, which I think, as he suggested himself, is an improvement on the previous Bill which he brought in last year, and that was a Bill with a very worthy aim, a Bill not in any way arival to the whole corpus of company legislation already extant in this country but a very useful supplement to those various pieces of legislation which have sought to increase shareholder protection in publicly quoted companies.
I therefore welcome this Bill in general terms. I welcome it because it aims at an important aspect of control and surveillance of company boards by their shareholders and seeks to fill a gap, as it were, in that part of the structure of the existing legislation. At the same time I freely concede what my hon. Friend the Under-Secretary said when he referred to some of the ways in which the Bill itself, although its spirit and its heart are in the right place, might be deficient in the letter.
I welcome the general aims of the Bill because I believe it relates to what is a very important matter which has been 1663 missed over the years. It is not only in the German Federal Republic but elsewhere that one finds examples of greater protection for shareholders in publicly quoted companies. There has been sufficient discussion in general terms in this country for us now all to be aware that provisions in this direction are probably necessary. There are many elements in, for example, the City of London which would welcome this kind of legislation. I feel that I should declare an interest, a tangential interest, in that I have pursued a career on the Stock Exchange.
Whatever views there may be among different kinds of financial institution in the City of London and elsewhere, and on the Stock Exchange in London and the provinces and in the new federation, it seems clear that over recent years events affecting particular individual companies have been sufficient to enable many to agree that the time has come to get around the table to try to devise a new solution to these problems.
As for the form of solution enunciated in the Bill, I find it attractive although one concedes that there could be argument about a number of details such as the number of non-executive directors to be appointed to a board, the actual definition of a company to have such directors, about the size of the company, and so on, and formulation of the non-executive directors' remuneration and salaries. All these are detailed matters suitable for consideration in discussing whether the Bill should be drawn in a slightly different or tighter way at a subsequent stage if the House were to give the Bill a Second Reading.
However, whatever the actual merits of the details, I think it remains clear, and I should be surprised if there were more than a few hon. Members on either side of the House who would disagree with this, that an additional insurance policy, so to speak, which would arise from a Measure such as this is attractive per se and, moreover, that there are sufficient numbers of people, experts and outside observers as well, who think so to make it worth while giving this matter serious consideration. In that respect, therefore, the Bill helps the public interest.
When one says "public interest" I suppose one thinks of shareholders, and 1664 I suppose that the definition of "shareholders" would in previous years have been very narrow and would have comprised a comparatively narrow number of persons. There are hon. Members, particularly on the Opposition side of the House, who would argue that the value of company shareholders is too narrowly based despite its expansion in recent years. It is an expansion which I have seen in my capacity as one of the representatives of the wider share ownership effort.
There are people who would ask how non-executive directors work. There is still the old style overhang of the classic outside director. One only has to recall those famous and popular cartoon strips of Bristow in the Evening Standard. I remember one in which the chairman wound up the proceedings of the board and said "Thank you, gentlemen; now we will get down to the important business. Please pass the brandy, George." That is the old-fashioned reputation of the non-executive director. But those who are close to reality and acquainted with how they work would pay tribute to the enormously important work which non-executive directors do, whether they represent the financial supporters of a corporate enterprise, whether they represent narrow interests or whether they have come to the board as a result of a particular contract. Although they have been maligned, generally speaking they do a successful job, with obvious exceptions which I shall not go into.
The reality of the shareholder and of the outside director has changed tangibly, and this change has accelerated in recent years. The value of the Bill is that it would, subject to improvement in detail, underwrite and define the ways in which non-executive directors could perform a useful specific function on behalf of shareholders, not in the narrow sense of representing a given section of shareholders, but in the wider sense of being an extra insurance policy which would never apply to the vast generality of publicly quoted companies which go from one year to another without difficulties, internal crises or bad management, but could apply in critical situations when it is clear that an additional safeguard structured in a rational way, as it would be in the Bill, could impinge on a crisis situation and ensure that bad management was either 1665 improved or changed and that shareholders became aware at the earliest formal opportunity of the difficulties and dangers.
What are the protections now? Some of them have been mentioned by my hon. Friend the Member for Kensington, South in introducing the Bill. There are the great institutions. I agree with him when he says that they are often far too reluctant to intervene in the affairs of a company in which they have a shareholding when those affairs are going from bad to worse. There is the Press. I pay tribute to the financial Press, which has become extremely lively, intelligent, acute and fast on the draw in recent years, which is all to the good of the public.
One has the chance of a crisis on a board, with outside directors making public statements. One has the chance of powerful individual shareholders making known their views. One does not have non-executive directors who could formally give a report as outlined in the Bill. In 99 per cent. of cases that might be a formality as dull and unexciting as the annual dreary repetition of the auditors' report, but in the critical minority of cases such a report would be useful. It might be reckoned as a final extreme course of action by the non-executive directors to say that, reluctant as they are, they have to make public in fewer than 1,000 words—or whatever is established—their misgivings about the way the company is run, their extreme anxiety about its future under the present management or their disappointment that changes which they have proposed have not been allowed by the executive directors.
For these reasons the Bill should be given a Second Reading.
§ Question put and agreed to.
§ Bill accordingly read a Second time.
§ Bill committed to a Standing Committee pursuant to Standing Order No. 40 (Committal of Bills).