SEPARATION OF POSTS OF CHAIRMAN AND CHIEF EXECUTIVE (Hansard, 27 February 1980)

§ Mr. Renton
I beg to move, That the clause be read a Second time.
The purpose of the clause is to achieve in large, publicly quoted companies—which I have defined as companies employing more than 2,000 people or having net assets in excess of £100 million—the separation of the posts of chairman and chief executive. I believe that the clause has one outstanding advantage, and that is that despite two lengthy and wide-ranging Committee stage debates on Companies Bills in the last 12 months, this is a subject that has not been touched on.
It has, therefore, at least the benefit of originality and freshness.
The clause also follows logically from the interesting debate we have just had on the issue of the statutory imposition of supervisory boards. I am against the legal imposition of supervisory boards, though I am all for companies, within their articles of association, developing in that way if they wish. In the holding company structure we already have many companies in this country with supervisory boards.
I am also against the legal imposition of employee directors, although I am all for companies, by consultation between boards and works councils if they so desire, having some representatives of their workforce on the board. That is a proper decision for companies to take.
My approach to corporate structure has always been that I prefer us to make use of the strengths within the present structure of companies. I do not believe in too much change, but I believe in using the 1481 positions of chairman, managing director, executive directors and non-executive directors to the full and, by implication, within a unitary hoard structure, making use of the creative tensions which can, and probably should, exist between executives and non-executives.
That has led me to my view, which is shared by a number of my hon. Friends, that in the larger publicly quoted companies the positions of chairman and chief executive should be divorced and held by separate people. In discussions with outside organisations I have found that that view has wide support among those concerned with corporate structure.
In large companies the chairman and the managing director have different jobs. The chairman is responsible for the social audit functions—keeping in touch with Governments and local authorities, being concerned about the environment and public relations, travelling round this country and the world meeting chairmen of other companies and forming impressions of how the industry in which he is involved is changing and developing. Above all, he is responsible to both shareholders and employees for overseeing and criticising the executive function.
The chief executive is the most senior representative of management. His job is to maximise profits, develop new products, expand overseas and see that the company is in the market place ahead of its competitors. By definition, he cannot be the best judge and critic of himself and the performance of the management that reports to him.
In suggesting the separation of the posts of chairman and chief executive I am introducing into the unitary board an element of the supervisory function, because if my suggestion were incorporated into the law the chairman and non-executive directors would, within a unitary board, be the supervisors of the managing director and the executive directors. We would be using to the full the strengths and tensions within the existing unitary board structure.
In our large companies there is too much danger of the personalisation of companies. Often an individual becomes lionised and the company comes to be thought of as his creation and empire. The hon. Member for Keighley (Mr. Cryer) referred to Mr. Rowland and Lonrho. 1482 That is one example of a company being identified with an individual, and we can all think of others.
The danger is that when such an individual has an accident, or dies or has to retire suddenly through ill health there may be a feeling that the whole company and its fortunes cound be in difficulties. The advantage of my proposal is that the concentration of a company's reputation and public image round one person would obviously be limited, at least halved, if the chairman and the chief executive were separate people.
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I quite understand that the chairmen who are already chief executives could complain about my proposal. Indeed, I have received some correspondence to that effect. That does not surprise me. If they consider the matter further they will realise that all my proposal calls for is a reorganisation of their functions. They would be reminded that, as chairmen, they are above all else chairmen of boards. Their primary duty is to the shareholders and the employees, whereas the chief executive or managing director has a duty to maximise the performance of management.
The second half of my new clause calls formally for shareholders' resolutions to approve at a general meeting the appointment of chairman and managing director, and for their reappointment at intervals of not less than five years.
It is an irony of our present position that in many articles of association the chief executive is appointed by the board, but that that appointment is not subject to confirmation by the shareholders. The appointment of non-executive directors to the board—who have a less important function in the company than that of the chief executive—must be ratified by the shareholders. That is an irony and an anomaly that should be rectified. It is one of the purposes of the second half of my new clause. Another purpose is to ensure that the appointment is checked and revalidated at the end of every five years.
I do not wish to protract my opening remarks, but I think that it is a subject that deserves consideration. As I said earlier, it has not been brought up in Committee stages of other company law Bills in the past 12 months. I shall be 1483 interested to hear my hon. Friend the Minister's remarks when he replies.

§ Mr. Parkinson
As my hon. Friend the Member for Mid-Sussex (Mr. Renton) said, one of the advantages of the debate is that it has an air of novelty about it. Almost every other subject that we have discussed in the past two days we have had the opportunity in Committee and in the House of discussing at least four or five times in the past 18 months. I wish to thank my hon. Friend for injecting this note of novelty into our proceedings. I am afraid that the remainder of my remarks may not be so welcome to him.
While we accept the validity of my hon. Friend's remarks, and while it may be desirable in some cases to separate the job of chairman from that of managing director, we think that it would be wrong to impose that as a condition on companies. As a statutory imposition, it would be a mistake.
Such an imposition may have the appearance of doing a number of the things that my hon. Friend said, but a strong chairman might, as a formality, elevate one of his colleagues to the position of managing director simply to comply with the rules. He would not be observing the spirit of my hon. Friend's remarks but merely complying with the law. That would open the door to a window-dressing operation which would satisfy the requirements of the law but do nothing to promote the objectives that my hon. Friend had in mind when he moved the clause.
It was interesting to note that in the Watkinson report a few years ago, when Lord Watkinson was keen on the idea that there was a strong case for separation, he said that experience in a wide range of companies shows that it is a matter in which some flexibility is essential. Once one builds into the law the sort of requirements that my hon. Friend has outlined, flexibility flies straight out of the window. Therefore, I am not attracted to the idea that we should impose this as an obligation on the range of companies that he described.
I have much more sympathy with the points that my hon. Friend made in the second half of his speech. He said that the appointment of the chairman and 1484 chief executive was a fairly major event about which the shareholders ought to have an opportunity of expressing a view, and that they ought to have the opportunity to reaffirm their decision at regular intervals.
I do not want to give my hon. Friend a cast-iron commitment, but we shall read what he has said with great interest. We shall certainly look with particular interest at the second half of the new clause and the ideas that he promotes in it. I shall keep in touch with him as our thoughts develop, and it may well be that in our next Bill, which will be introduced in the next Session, we shall be able to meet some of the points that he has made so persuasively tonight.

§ Mr. Clinton Davis
I heard—I do not have to read it again—the speech of the hon. Member for Mid-Sussex (Mr. Renton). It was a most interesting speech, and the hon. Gentleman put forward many constructive ideas. But evidently those chairmen and chief executives who have written to him in such numbers will be able to breathe again and will be able to sleep in their beds tonight in absolutely security.
I hope that the Minister will give careful thought to this idea. It has been embarked upon with some success in the United States. I am not quite sure whether it is a mandatory provision there, or whether it was something recommended by the SEC. My recollection does not enable me to recall exactly what the situation is. However, I know that in most instances there is a separation, and it seems to be something that has worked remarkably well.
I hope that this is not something that will die with the debate tonight. The Minister said that he would look at one part of the new clause. I hope that he will look at both parts, because I believe that the hon. Gentleman has made a number of interesting points.

§ Mr. Renton
My hon. Friend has given me one crutch of comfort without giving me the second. I also thank the hon. Member for Hackney, Central (Mr. Davis) for his reference to practice in the United States. He is right, in that evidently there is a separation of duties.
I do not propose to remind my hon. Friend at quite the same length as the 1485 right hon. and learned Member for Warley, West (Mr. Archer) that this is a matter which will not go away. I shall be looking with great interest at what is contained in the next companies Bill. I thank him for his offer to keep in touch with me about it in the meantime.