HC Deb 19 October 1976 vol 917 cc1302-14

'The matters to which the directors of a company shall have regard in exercising their powers shall include the interests of the company's employees generally as well as the interests of its members.'—[Sir B. Rhys Williams.]

Brought up, and read the First time.

Sir B. Rhys Williams

I beg to move, That the clause be read a Second time.

It seems to me that four important questions are raised by the clause. What is the purpose of the joint stock company? What are the claims of labour and capital to the benefits of their joint efforts? What are the responsibilities of the directors? And what is it useful to do by legislation?

I recognise that those are four very large questions and that the Bill, as it was brought before the House originally, was intended not to be a large one. But these are matters which are of intense public interest not only because of the appointment of the Bullock Committee but because the public is waking up to the hopeless inadequacy of our company law. It is right that the House should give its mind to these questions and that the Minister should say precisely where the Government stands on the issue.

Of course, we recognise that the clause bears a striking similarity to Clause 53 in the Conservative Companies Bill of 1973.

Dealing as briefly as I can with my four questions, first, what is the purpose of the joint stock company? Is it profit? Is it to provide employment? Is it primarily to secure consumer satisfaction? No doubt those are important aspects of the objectives of a joint stock company, but surely we must include continuity both of the assets and of employment—in so far as the company can achieve those objectives—in any reasonable list of joint stock company purposes. If we are to consider continuity of employment as one of the four objects, the question immediately arises how the directors are to address themselves to that.

The second question which I have posed is, what are the claims of labour and capital to the benefits of their joint efforts? I am told that employees do not appear anywhere in our company law. This illustrates how desperately out of date British company law has become. I suppose that it was possible at one time for people to hold sincerely that the interests of the employees ended when they received their pay. But public opinion revolts at the commodity theory of labour, and I believe that our company law should acknowledge that fact. It is wrong that we should proceed, towards the end of the twentieth century, with a body of company law which was already obsolete at the end of the nineteenth.

What are the responsibilities of directors? Here, I hope that I may be allowed to read from the speech of my right hon. Friend the Member for Worcester (Mr. Walker) on 17th January 1974 when he introduced the 1973 Bill. He said: Clause 53 makes it clear that directors are entitled to have proper regard to the interests of the company's employees in the decisions they take. It would be a poor board if it did not do this, and any reasonably active union or staff association would soon bring to its attention the negligence involved. But since it may happen that boards feel inhibited from benefiting the employees in ways which might be represented to shareholders as not directly in the shareholders' interests, we think that it is desirable to make it clear that a director who genuinely decides on measures which benefit the employees would have a complete defence against any claim that he was acting ultra vires."—[Official Report, 17th January 1974; Vol. 867, c. 934.] If it were important that that should be done in 1973, it is just as important that it should happen in 1976. Cerainly we should all be embarrassed if an action were brought against a board because it had acted in what appeared to be the interests of the employees in distinction to those of the shareholders. This could be an urgent matter for a company board at any time.

Parliament should not leave a gap which can be filled only by boards of directors acting in a way which they know to be, morally and in the opinion of the public, inadmissible. So we have to clarify what are the responsibilities of directors, and it is not satisfactory that we should proceed to next year and perhaps the following year with this hopelessly anomalous position in our company law that, in principle, the directors can attend only to the interests of shreholders and may not consider those of the employees. The form in which I have reintroduced Clause 53 has strengthened it, but that is only an acknowledgment of the strength of public opinion on this matter.

1.15 a.m.

Finally, what is it useful to do by legislation? We have to recognise that company law may appear to have only a sort of hortatory or incantational quality in cases where boards have very complex matters to decide. Company law cannot foresee all the situations which boards have to consider. But it is right that Parliament should give clear guidelines to the people in joint stock companies who have to take difficult decisions, sometimes involving large numbers of employees or the interests of many shareholders. It is useful that company law should include guidelines as well as highly specific instructions on company procedure.

I heard a story many years ago about Elizabeth I, that in a flash of genius, she presented a clock to the people of the Isle of Man. We can well imagine the effect which the introduction of an accurate time piece would have on a primitive agricultural society which had never before had the benefit of accurate time. If hon. Members accept the new clause, we shall be doing something rather like that—we shall be putting a clock in every board room to guide directors and to remind them of their obligations to the company's employees.

The twentieth century is now in its last quarter. Surely we must all accept that human values are more important than purely material considerations.

Mr. Clinton Davis

No one in the House, certainly no one who served on the Committee which considered the Bill or has known the hon. Member for Kensington (Sir B. Rhys Williams) for any time, will doubt the personal integrity in his approach to this important matter. He has done much positive thinking about it and a number of his ideas are worthy of the most careful consideration.

I can assure the hon. Member that his ideas will be given that consideration in time for the next tranche of company legisation—which will not be as modest as this one. The hon. Member is entitled to the assurance which I give now that his ideas on the responsibilities and duties of directors and companies in this matter will be looked at most carefully in relation to the Bullock proposals which will be the subject of the next important legislation in this area.

I agree with the hon. Gentleman that it is impossible for us to accept any longer that the legal description of the duties of directors should be so narrowly drawn. It is right that the interests of employees should be recognised in law. The hon. Gentleman rightly pointed out that they are not now.

Although I welcome the hon. Gentleman's approach, I think that this is, in essence, a probing amendment to enable a debate—at a rather late hour unfortunately—on an important issue. I hope that the House will have time to discuss industrial democracy in more depth in future months.

The approach of the hon. Member for Kensington is certainly far more radical than that enunciated in the 1973 Bill with its permissive arrangements in Clause 53. I described them in Committee as tepid and tentative, and the speech of the hon. Gentleman has borne out my remarks.

With regret, I have to advise the House that it would be wrong to isolate this aspect and to legislate on it alone. The issues with which the hon. Gentleman and his hon. Friends are concerned go to the very heart of company law—the duties and responsibilities of a company. This is not something which can be altered lightly. Changes are likely to have major consequences for the rest of company law and would have implications for the way in which companies are run and investment is financed.

I think that the hon. Gentleman started at the wrong end. The new clause is concerned solely with the matters to which the directors shall have regard in exercising their powers. I suggest that the powers of the directors derive from the powers of the company. Therefore, we should start by considering the powers and responsibilities of companies rather than of directors.

The traditional concept of the company is as a legal vehicle for enabling the resources of many people—the shareholders—to be grouped together for a common aim, which is essentially the economic gain of its members. This is the way in which the position is reflected in the law and in companies' memoranda and articles of association. It is high time that we and companies started to reorganise our thinking on these matters.

In order to make employee participation fully effective and properly to recognise the importance of the contribution of the employees, it is necessary to alter the basic concepts on which we act. We must move towards a new philosophy in which both employees and shareholders are regarded as having a stake in the company and in which the company is recognised as having duties and responsibilities both to employees and to shareholders. That is what Bullock is all about.

If we were disposed to legislate solely in relation to the exercise of the directors' powers, we would be led into an unsatisfactory situation. We have to consider the consequences.

In some circumstances it might be entirely outside the powers of the company, as the law stands, to act in the interests of the employees if this were to collide with the interests of the shareholders. The most obvious example is where a company ceases to trade. Indeed in the case of Parke v. Daily News, it was held that a company which was disposing of its business had no power, even with the approval of the shareholders, to make any provision for employees in addition to that to which they were statutorily entitled, because such provision could in no way benefit the interests of the shareholders.

It is clear that we have to amend the law to overturn that decision, but the clause does not do that. We must address our attention to that matter, because it is of fundamental importance. It would put the directors in a difficult position, because they would be required by law to take account of the interests of employees while being prevented by law from taking the action that would meet those interests. This is an example of the kind of problem which we shall face.

Another problem that we need to consider is how to enforce the provision. The clause is silent on the question of enforcement.

What would be the consequences of the right which is said to be given to the employees? We do not want to create a situation in which there is endless litigation about the decisions reached by directors in circumstances in which the interests of the employees and of the shareholders conflicted and one group or the other considered that insufficient regard had been paid to its interests. We must look at this matter in its totality and consider the effects of introducing this proposal.

I have cited one or two examples which I hope will cause the hon. Member for Kensington to feel that it has been helpful to have had the debate but that it would be unhelpful, because of the difficulties to which I have alluded, to introduce the clause in its present form.

These are not mere technicalities. They are fundamental questions of company law which are central to the work of the Bullock Committee.

I do not think that we can sensibly provide for worker participation on com- pany boards until we have considered what are or should be the responsibilities and duties of companies and of their directors. I assure the House that, when we come to legislate on industrial democracy, we shall have to deal with these issues. That is inescapable. I hope, therefore, that the hon. Gentleman will feel it appropriate in the circumstances to seek to ask leave to withdraw the motion and clause.

Mr. Wigley

This matter arose in different guises in Committee against the background of the Bill, the Bullock Committee and the possibility of legislation in the near future, in that it touches on the question of responsibility towards employees.

I support the remarks of the hon. Member for Kensington (Sir B. Rhys Williams). I hope that the Government are in a position to give a commitment that, assuming that the Bullock Committee comes forward with recommendations fairly shortly, as expected, they will publish in the next Session their own thoughts on the matter, even if they are not in a position to adhere to the original timetable and to legislate during that session. I hope that, if they can publish their thoughts on the Bullock recommendations, between 1977 and 1978 we can expect a major Bill to provide a great step forward in industrial democracy, taking in many of the points made in this debate and in Committee. The time is more than ripe to give urgent attention to the matter. We have to wait for Bullock, but when that committee's report is published, I hope that there will not be any delay from any quarter.

Mr. Parkinson

I support my hon. Friend the Member for Kensington (Sir B. Rhys Williams), but I would not like anyone to think that successful businesses are successful only because the directors put the interests of the shareholders ahead of those of the employees. The most successful businesses are those whose sensible directors take account of the interests of the people in the business, of those who own it and of the locality in which it is situated. I put that point in case New Clause 6 should be misinterpreted as suggesting that one can run a successful business only by exploiting the employees and disregarding their interests in the interests of the shareholders. That is not the case. I know the spirit in which my hon. Friend moved the new clause, and in that spirit I support it.

Mr. Tim Renton

I thank my hon. Friend the Member for Kensington (Sir B. Rhys Williams) for all the work he has done on company law over the years and for the number of matters he has brought to our attention, regarding, for example, the role and power of non-executive directors, when he focused on ways and means of strengthening the corporate structure. He has continued in that role with New Clause 6.

I support what was said by my hon. Friend the Member for Hertfordshire, South (Mr. Parkinson). The successful company, whatever company law now or at the end of 1977 or 1978 may be, will not think only of the interests of its shareholders but also about its workforce, the environment and its customers and consumers. It is only by thinking of these things that it will remain successful.

It can be argued on from that that a provision in law that the directors should have regard to the interests of the shareholders and of employees is unnecessary, because it is only by having regard to the interests of the employees that the interests of the shareholders will be furthered. If a company were to be run totally contrary to all the wishes of its employees, to their lives and hopes, it would get into difficulties and the shareholders would be disadvantaged.

This is a very important new clause and it is distressing, as other hon. Members have said, that we should be discussing it at such a late hour and in such a thin House, because it goes to the root of so many things that will affect the future development of companies in this country.

1.30 a.m.

There is a matter on which I should like, unusually, to take issue with the Under-Secretary. He referred to Clause 53 of the Conservative Bill of 1973 as permissive, tepid and tentative. I suppose that at this late hour he had to resort to a bit of hyperbole in order to keep his hon. Friends awake. He may have awakened some of us for a few minutes. But how is it possible to regard that clause as permissive, tepid and tentative when, in contradistinction to the clause moved by my hon. Friend, it says—"are entitled" to have regard to the employees' interests rather than "shall have regard to the employees' interests". To say that that is permissive seems to be stretching the use of the word "permissive" to the extreme.

Clause 53 of the 1973 Bill was going all the way towards what my hon. Friend the Member for Kensington has moved tonight.

I think also that it is incorrect to continue to refer to the case of Park v. Daily News as an instance of why the law needs changing. It is abundantly plain, looking back at that case, that it was ruled that it was wrong for the board to make a distribution of assets in the company to the employees because the Daily News had no continuing life. It was coming to an end. Certainly since then I have been advised that in a different case, where a company has a continuing life, the same ruling would not be given. It would be adjudged, as I said in my opening remarks, that there is a direct interest for the shareholders in keeping the employees happy. Therefore the Park v. Daily News case is not particularly apposite, and it is not a particularly good example to quote.

I appreciate, however, as was said by the hon. Member for Caernarvon (Mr. Wigley)—who added a great deal to our deliberations in Committee—that the Bullock Committee is ahead of us. What it will say on this and other matters is of extreme importance. I feel, therefore, that tempting as the clause is, probably we should wait for the Bullock Committee to report.

The Under-Secretary finds himself in a very ambivalent position in arguing against the new clause. On the one hand, he naturally feels that he must seem to be the defender of the employees' interests —and quite rightly, too. On the other hand, he has to say "I do not think this is the right moment".

But the Bullock Report is ahead of us. We must wait for the findings of the Committee. It would be helpful to us if the Under-Secretary could tell us when we are likely to hear from the Bullock Committee. Will it report by the end of the year? When will the findings be published'? Will it be in time for legislation in the 1976–77 Session? Are we to have a Green Paper on the Bullock Committee's recommendations, in order that the House can have a full opportunity of considering them before a Bill comes forward? Or will there be a White Paper on them?

Is it the Under-Secretary's view that the Bullock Committee will bring forward a unanimous recommendation, or will it split in different directions? All these are matters on which any light would be very helpful.

I thank my hon. Friend for introducing the new clause and for the interest he has taken in the subject. Like him, we shall wait for the Bullock Report with eager anticipation before coming back to the matter.

Mr. Clinton Davis

I shall try to deal with these various points as rapidly as possible, but deal with them sufficiently. The hon. Member for Caernarvon (Mr. Wigley) asked me to give an undertaking that we would publish our own thinking on the Bullock recommendations in the next Session of Parliament. That is quite clear. Indeed, we have given an undertaking to introduce legislation in the next Session of Parliament. Whether, in fact, it will be better to introduce a Bill for Second Reading, or annex a draft Bill to a White Paper, one cannot foresee at the moment—nor can I give any undertaking about whether we shall have a Green Paper or a White Paper. We shall have to see what the Bullock recommendations are. That is the right way to deal with this, and that was the point made by the hon. Member for Mid-Sussex (Mr. Renton).

Certainly, the Bullock report will be published. I can give the hon. Member for Caernarvon that clear undertaking. I have dealt with the way in which the Government will deal with the matter. The uncertainties must depend upon what will be resolved when we look at the Bullock Committee recommendations. I dealt with that during Question Time on Monday. I shall certainly not engage in any speculation about the report itself, and I do not think it is right for the hon. Gentleman to invite me to do so.

In respect of the point made by the hon. Member for Hertfordshire, South (Mr. Parkinson), which was echoed by his hon. Friend the Member for Mid-Sussex, I think it is right that successful business should have regard to the sort of criteria we have been talking about. But it is not true that most apply the concepts that we have been talking about as widely or as liberally as the hon. Gentleman seemed to suggest. That is why we have set up the Bullock Committee. There are a great many pressures, not only in this country but more widely within Europe. I believe those pressures are irresistible. It is not simply a question of having regard, and presenting a fait accompli, and consulting in that sort of way with one's employees. One has to encourage them in active participation and try to create an emotional attachment to the success of the business, not only on the part of the employees but on the part of everyone engaged in the enterprise. That is what I believe goes to the heart of our thinking on this matter.

With regard to Clause 53, the hon. Member for Mid-Sussex simply does not understand what "permissive" means. It is the opposite of mandatory. In fact, Clause 53 was not mandatory, it was permissive. That is no sort of queer construction of words on my part. It is absolutely plain and it was intended to be. That is why the hon. Member for Kensington (Sir B. Rhys Williams) has not adopted that wording. He wanted to make it mandatory. That is why he used the word "shall". There is a world of difference between the thinking of the hon. Member for Kensington and that of his hon. Friend the Member for Mid-Sussex.

When the hon. Member for Kensington seemed to imply that it was unnecessary to have any legal change in these matters I find that perplexing in the extreme. I hope that he does not speak for the Conservative Front Bench on that point. Legal change is absolutely essential and it is irresistible. There is nothing ambivalent in the stance that I have taken, but there is something ambivalent in the stance of the hon. Member for Kensington. In those circumstances, I hope that he will withdraw the motion and new clause.

Sir B. Rhys Williams

We have ranged over some very serious topics. I believe that this short debate will be of interest to students of company law. I recognise the force of the points which have been made on both sides of the House. I would thank the Minister particularly for the way in which he responded to the initiative of myself and my hon. Friends and the seriousness with which he took our proposal.

I recognise that he made a particularly valid point when he drew a distinction between the responsibilities of the company and the responsibilities of the directors. If directors are asked to do something which the company is not simultaneously required to do, that may give rise to an impossible situation. That is a valid reason why we should not proceed with New Clause 6 as it stands. However, the problem remains.

I acknowledge what was said by my hon. Friend the Member for Hertfordshire, South (Mr. Parkinson) as to what happens in actual practice. It is because normal practice has gone so far ahead of company law that our joint stock companies are able to operate at all. But company law ought not to be left so completely behind. Boards of directors act with a certainty that they have to protect the interests of the employees, because if they do not do so they are plainly flouting the interests of their shareholders in the normal course of events.

However, certain problems are now arising with the present difficulties for business and the tragic increase in the number of business failures. There are daily problems for boards in considering their employment policies. Situations are arising all the time in which boards might well perceive that they are acting ultra vires if they plainly support the interests of the employees in a way that could be held to be in conflict with the interests of shareholders.

Therefore, Parliament must not delay. The Minister has made clear the Government's attitude. From what has been said by Opposition Members, the attitude of the Conservative Party and other Opposition parties is clear. Boards need be in no doubt about the will of Parliament. However, the present state of company law is quite unsatisfactory and I am glad of the Minister's unambiguous assurance that something will be done about it quickly. In the light of that assurance, I am happy to withdraw my new clause. I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

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