Companies and Building Societies (Hansard, 8 June 1982)

§ Sir Brandon Rhys Williams (Kensington)

I beg to move, That leave be given to bring a Bill to amend the law relating to the election and responsibilities of directors of companies and building societies; to provide for the eligibility of candidates for such directorships; to require the circulation of particulars of such candidates to the members and for the consideration of the appointment of non-executive directors before any election of directors; to make new provision in regard to the amendment of memoranda and articles of association of companies; and to make other changes in the law relating to companies and building societies. As the House knows, I have campaigned for a number of years to find ways of strengthening the influence of shareholders as a force working for the maintenance of the efficiency of the executive management of public companies. In general I have a great admiration for the structure of the British public company, which has evolved over many years; but we must be concerned about the number of occasions which have been brought to public notice lately where firms are not operating quite as efficiently as they ought to be or could be. Minor changes in the law might have an extremely beneficial effect in strengthening the effectiveness and the standing of the supervisory elements which are part of the structure of public companies. I am thinking in particular of the non-executive director:; and the auditors.

When I began to introduce my series of Bills—the Bill I am seeking to introduce today is another—I was under the impression that the best way to operate would be to require all public companies to appoint not fewer than three non-executive directors. I still believe that that would be a good target for companies to aim at, but I am influenced by the number of people who think it would be difficult to introduce such a requirement by statute and that it is better for companies to find their way to it on their own and to select people for the non-executive directors' role over the course of time, rather than in a tremendous hurry in response to legislation.

So, in this Bill, I am looking for less dramatic ways of increasing the authority of non-executive directors on the boards of public companies. I know that a number of hon. Members feel that we already have a mass of company law, much of which is hard to digest, and that to add still more to it would place a burden on companies which it would be better to avoid. In answer to that criticism I say that so much of our company law is not quite as effective as it ought to be, and is sometimes difficult to interpret. A short Bill which makes some of the existing law easier to operate and to understand would serve a useful purpose without adding to the burdens on management.

I suggest, for example, that the balance sheet of every public company should state which of the directors are non-executive directors. That does not change their functions in any way but it would help the shareholders to discern the structure of the board. When there is a vacancy which has to be filled by the election of a director it ought to be easier for a group of shareholders to nominate a candidate of their own if they are not satisfied that a nominee who has been put forward by the company is necessarily the best person to fill the vacancy. The particulars of candidates for board vacancies should be circulated in advance of the meeting at which the election 35 is to take place, together with the names and particulars of candidates who can show that they are sponsored by a significant body of shareholders.

In the Bill I am seeking to include provision for building societies. This raises a point about which a number of hon. Members are concerned. There have been some cases lately where members of building societies have been frustrated in seeking to put forward names of candidates for the board. There are evidently gaps in building society law which have been shown up by recent controversies and which ought to be put right. Building societies are not companies. In my Bill, therefore, it would be necessary to introduce a separate clause to deal with this matter. With the help of hon. Members on both sides of the House I hope to be able to table a clause—or a series of clauses—in relation to building societies that will attract the support of colleagues on both sides of the House.

With regard to the auditors, it would be helpful in cases where management is not as well informed as it ought to be about what is happening within the company if the auditors were to have limited powers to encourage companies to improve their internal control and forecasting procedures. In previous Bills I have introduced a formula which I believe would be helpful in this respect. I would be ready to amend my suggestion if colleagues felt that it was not quite in the form in which it would be most acceptable to the profession, but I believe that the majority of auditors would agree that problems often arise within companies because of the lack of information which could be readily obtained, or through the lack of forecasts which ought to be made if the board is acting prudently.

The Bill would require large public companies—firms with at least 50,000 employees or a turnover of at least £200 million a year—to make a small change in the procedure at their annual general meetings. I suggest that one of the items that would have to be considered would be the appointment or re-appointment of an audit committee. It does not place a heavy burden on such companies simply to require them to include that item on the agenda of their annual general meetings. The effect would be helpful, however, because it would require the chairman before each annual general meeting to give some consideration to the reply he would give if this question were to be raised by a shareholder. It is therefore a provision which would keep the subject of the appointment of an audit committee alive. At any rate, it would be brought up once a year.

If a shareholder who is familiar with the American practice in respect of audit committees wanted to raise this point he could not be ruled out of order in so doing. That 36 would also be helpful, because the annual general meeting is sometimes a short and formal affair which is autocratically managed from the platform. Shareholders often feel that they have little opportunity to make their point if they rise to speak at an annual general meeting.

I am aware in seeking leave to introduce the Bill at this stage in the Session that there is little chance of its completing all its stages. I hope, nevertheless, that the House will be willing to allow me to do so. The campaign that I have sustained over a number of years, particularly with regard to the status of non-executive directors, is having effect. The Institute of Directors favours the idea and is making facilities for its members to choose suitable non-executive directors to add to their boards. In recent weeks it has been announced that the Stock Exchange and the Bank of England are doing very much the same and have set up an institution that will promote the idea of appointing non-executive directors to public companies and also help firms to find suitable people to fill these responsible positions.

I believe that the work that I have done with the support of Members on both sides of the House has been fruitful, but that this is not the moment to give up. I hope that in due course I may actually succeed in changing our company law, at any rate in small respects, but in ways which would accelerate the appointment of non-executive directors and which would be helpful to the auditors. I hope therefore that the House will give me leave to introduce the Bill.