APPOINTMENT OF DIRECTORS (Hansard, 27 February 1980)

§ Sir Brandon Rhys Williams (Kensington)
I beg to move, That the clause be read a Second time.
It gave me great pleasure, Mr. Speaker, to discover that there had been an amendment to your selection list for today and that you had decided to include the opportunity for me to introduce a debate on new clause 34.
I do not need to introduce it at enormous length. The House is possibly aware by now that I believe that it is most important that public companies should appoint non-executive directors. I fully recognise the arguments of those who say that the selection of suitable people to be non-executive directors is extremely important.
1486 With regard to the procedure for the election of directors, the Companies Act as it stands is somewhat imprecise. All too often what happens is that when a board vacancy arises it is filled by the existing members of the board, and when the person who has been chosen as an interim measure comes up for ratification at the annual general meeting, his appointment is almost invariably approved automatically.
If the vacancy first arises the directors will make a nomination at the annual general meeting. No other person normally will be nominated and the few shareholders present with any interest in what is happening will automatically approve the name that is put in front of them, whether or not that person is suitable for the job. I am not trying to say that boards of directors consist of unsuitable people. But we need to be more careful about the selection of non-executive directors. I have been asking myself for some time how we can solve the problem of making sure that the right people are chosen for this role. We must find a way of enabling the shareholders to play a more active and better-informed part in the appointment of directors, and we should seek to ensure that vacancies are filled after a contest, rather than by the adoption of the only name put forward.
I have sought to devise a way in which, through a small change in the Companies Act 1948, names could be put before shareholders sufficiently long in advance for them to be able to consider the qualifications of the various candidates, and possibly to take advice through the press or from other comment that they might receive, and to make an informed judgment.
I realise that it is difficult for a small shareholder to differentiate between the qualifications of one candidate and another. But the institutional investor could adopt the role of selection agent—if I may call it that—between different candidates for board responsibilities.
I have often made the point that we must try to find ways of helping institutions to take a more active hand in management without becoming insider traders. This is one of the ways in which institutional investors could exercise a benign influence without stepping ahead 1487 of the other shareholders, or seeking to acquire inside knowledge which, inevitably, over the course of time, would colour their investment judgment. In a question of choice of personalities, the institutions could begin to play an extremely responsible and important role.
Section 140 of the 1948 Act already allows certain bodies of shareholders to require the companies to circulate to the members notices that they think are important. I do not see why that section should not be used to require the company to let the members know in advance of an election of a candidate that it wishes to propose, so that the shareholders are warned that there is to be an election. A group of shareholders, other than the board, could also put forward a candidate, and circulate his name and particulars to the shareholders at the company's expense.
The criteria in the existing Act are, I believe, too difficult. Therefore, in new clause 34 I have tried to suggest a way in which the conditions might be modified so that a group of shareholders could work together to bring new blood to the board, without being baffled by procedure.
My particular recommendation is that a group of shareholders with as little as 2 per cent. of the equity might be entitled to require the company to circulate the name and particulars of its candidate. That would allow perhaps even one important investing institution, or a group of investing institutions with small holdings, to come together to suggest one or two candidates who might have a beneficial effect if they were elected to the board. I have not forgotten the small shareholders. I have suggested that as few as 10 members with a holding of £1,000 could also put up their own candidate.
9.45 pm
These are, of course, matters for further discussion. I recognise that it is very unlikely that a clause drafted by a Back Bencher will be in a sufficiently accurate form to be adopted as it stands. But I hope that my hon. Friend—I know that he has given the subject a good deal of thought—may be prepared to look further into the possibilities of what I am suggesting, and that a reform on these lines may be on its way to the statute book.

§ Mr. Parkinson
My hon. Friend the Member for Kensington (Sir B. Rhys Williams) has, as usual, brought before the House a very interesting suggestion and has identified a problem that is, I believe, in need of an answer.
The problem is that very few people know anything about the directors whom they elect to the boards of the companies in which they are shareholders. A name appears on the agenda saying that Mr. So-and-so is retiring by rotation and, being eligible, offers himself for reelection. The shareholders who bother to turn up hear a quick muttering and the item goes through on the nod so that there is re-elected to the board of directors a person about whom many of the shareholders know nothing.
There is a very strong case for putting in the agenda of the annual general meeting a few details about the person whom the shareholders are being invited to reelect so that people may know for whom they are voting and for what policy—or at least have a chance to do so if they bother to read the agenda.
The procedure suggested by my hon. Friend is very cumbersome and I do not think that it is one that I would wish to recommend to the House. But in his search to make companies more responsive to their shareholders, and in his ambition to make sure that the shareholders know something more about the people whom they are to elect as directors, my hon. Friend is to be encouraged.
We cannot accept the clause, but we accept the spirit in which my hon. Friend moved it. We shall look at ways —perhaps a little less cumbersome than the ones he has suggested, and a little less regimented—of trying to accommodate at least some of his ambitions.

Mr. Keith Wiekenden (Dorking)
Is it not the case that at present shareholders may nominate directors if they know when the annual general meeting is to be held? Provided they give the requisite notice, surely they may nominate a director. It would be a very rash shareholder who nominated such a director without circulating details to other directors.

§ Mr. Parkinson
My hon. Friend is right. It is possible for shareholders 1489 at the moment, under the present rules, to nominate directors. It would not be a bad thing, as a matter of course, for shareholders to know a little about the people they are electing as directors of the companies in which they hold shares. After all, we all make sure that our electors know a little about us before we invite them to vote for us. We hope that sometimes it influences them.
I have not any great ambitions about this matter, but my hon. Friend is right in constantly seeking to find ways of making companies more responsive to the views of their members and of making sure that people who run companies' affairs are properly elected by those who elect them. In those two ambitions he is to be encouraged, and it is against that background that we shall look at his suggestion.

§ Sir Brandon Rhys Williams
I am very grateful to my hon. Friend, and I appreciate the welcome that he has given to the spirit that lies behind my amendment. I recognise that it would not be fruitful to press it but I hope that he will accept this much of what I have recommended, that is, that in future no election should be valid unless some particulars have been circulated beforehand of the candidate for a directorship.
My hon. Friend is perfectly right. Shareholders can use section 140 of the Companies Act, or possibly other means, to put up a candidate for a directorship. But it is difficult and unusual for them to secure the right to require the particulars of the person they choose to be circulated in advance at the expense of the company. The more common practice is to put someone forward at the shareholders' meeting, by which time it is almost certainly too late to overcome the proxies already held by the board in favour of its own candidate.
I should like to see the quality of all candidates for company directorships improved by the fact that boards would be ashamed to circulate the particulars of someone who was plainly not a suitable person. That would act as a barrier. More important, I am trying to provoke contests for vacancies on the boards of important companies and enable shareholders to choose between a number of good candidates.