COMPANIES (AUDIT COMMITTEES) (Hansard, 25 January 1977)

§ Sir Brandon Rhys Williams (Kensington)

I beg to move, That leave be given to bring in a Bill to amend the law relating to directors of companies; to make provision with respect to the appointment and functions of non-executive directors, auditors and audit committees in major public companies; to require the preparation of certain data and estimates for consideration by audit committees; and for connected purposes. The House has been very indulgent to my campaign since 1969 to secure reform of company law to give statutory effect to the concept of the management audit. I believe that public opinion is ready to accept legislation of this kind, in the interests of good management and efficiency of the big companies in the private sector of the mixed economy. I also feel, from correspondence I have received in recent months, that professional opinion strongly supports the recommendations contained in my Bill.

The Bill proposes that companies employing 1,500 people or with assets of not less than £5 million should employ at least three non-executive directors. This is not a controversial proposal because the great majority of such companies already have one or more non-executive directors. But the Bill possibly breaks new ground by providing that non-executive directors in the larger companies should be required to perform a particular statutory function.

The Bill provides that companies employing not fewer than 2,000 employees or with assets of £10 million—which includes the 700 largest publicly-quoted companies—should appoint three non-executive directors to an audit committee of the board. The auditors would have a right to attend the committee and also to convene the committee.

In proposing the concept of an audit committee I am guided by established Canadian and United States practice. I understand that it is now generally accepted in companies quoted on the New York Stock Exchange that a subcommittee of the board should be appointed to carry out the functions of the audit committee. The directors of the New York Stock Exchange intend to make it obligatory after June 1978 for 1202 companies quoted on the New York Stock Exchange to have such a committee.

I would also like the Bill to include provision in regard to the preparation of data on current performance and forward estimates as required by the audit committee. Clearly, if the audit committee is to do a responsible job it must have the necessary information to enable it to assess future profitability of the company and its ability to pay its debts as they fall due. Of course, the preparation of current data and forward estimates is normal practice in almost every large company, although sometimes it is not carried out as meticulously as might be desirable.

The functions that I would give by statute to the audit committee are that it should meet at least twice a year, it should examine the financial statements before they are issued to the shareholders, it should report formally to the board on its meetings, it should make recommendations on the choice of auditors and should publish a statement with the balance sheet confirming, first, that the data necessary to assess the company's position had been provided as required and stating, secondly, whether in its opinion the board had duly considered its reports. I consider that the publication of such a statement would enable the members of the audit committee to exercise reasonable discipline within the company to ensure that its opinions were attended to properly.

I would stipulate that in no circumstances should members of the audit committee release confidential company information. But should any member of the audit committee feel obliged to resign because of any special circumstances, he should report his reasons publicly.

I recognise that hon. Members will be concerned that my Bill might in some way be in conflict with the recommendations of the Bullock Committee which are becoming generally known and, I believe, are to be published tomorrow. In fact, my recommendations are not in conflict with what I understand the Bullock Committee seeks to recommend, nor are they subsidiary. I am trying to bring in a reform in a somewhat different area, namely, in the supervisory functions of the board, and what I seek to do is not in conflict with the provision for strong 1203 statutory regulations in regard to employee participation. I recognise fully the importance of the move in that direction. My Bill is not in conflict with it. Indeed, I believe that if, as a result of the changes which are to come in company law, we were to see a number of fresh faces in the board rooms of our large companies, they would welcome finding the audit committee as established practice so that they would be able to look to the auditors to provide impartial professional guidance.

Some of my colleagues, I know, wonder whether it is necessary to legislate or to legislate yet. Of course, many companies may wish to introduce audit committees without the compulsion of legislation. Some of our largest companies have already done so. Whether or not the House is willing to accept my Bill, I foresee a rapid expansion of the practice of appointing audit committees in future years.

But the House should remember that limited liability gives certain privileges to publicly quoted companies and that they must therefore be ready to accept legislation so that the weaker companies are brought up to the standards already established in the best.

I know that others are concerned that the people to operate audit committees may not be available in sufficient numbers. I do not believe that. British industry produces a surplus of competent, well-trained executives with suitable experience in middle life. Given the opportunity, I am sure that such people would readily be able to prepare themselves for a second career in the rôle of non-executive directors with these 1204 duties. Nevertheless, I should be prepared to recommend that my Bill should not be given statutory effect until, say, 1980 to enable all concerned to prepare themselves for their rôles and to study the etiquette of competent performance of the audit committee's job.

Those are the outlines of the Bill which I seek to introduce. It has all-party support. I do not believe that it is controversial in a party sense. However, I believe that it would be a useful step forward in safeguarding shareholders, assisting employees and aiding the efficiency of British companies. I trust, therefore, that the House will give me leave, once again, to introduce this Bill.