Companies (Hansard, 1 November 1983)

§ Sir Brandon Rhys Williams (Kensington)

I beg to move That leave be given to bring in a Bill to amend the law relating to the election and responsibilities of directors of companies; to require the circulation of particulars of candidates to the members and the consideration of the appointment of non-executive directors before any election of directors; to make provision in regard to the establishment of audit committees; and to make other changes in the law relating to companies. The object of the Bill is to strengthen the powers that shareholders and auditors can exercise in the proper supervision of company managements. In this Bill I am concerned not so much with trying to tackle fraud or serious malpractice as with the problem of companies in which the management is beginning to fall below the level of efficiency that investors, customers and employees are entitled to expect.

It is obviously not practicable for Parliament to pass laws simply requiring directors of companies "to be efficient"; but there are ways of changing the statutory procedures if shareholders or auditors begin to become concerned, which would tend to bring about improvements without making damaging disclosures, or creating undue public unease, which would harm the business.

I would like to include the following provisions in my Bill. First, public companies should be required to state with the balance sheet which of their directors are non-executive directors. Secondly, the names and particulars of candidates seeking election or re-election to the board should be circulated to shareholders before the election meeting, including the names and particulars of candidates proposed by any significant element among the shareholders. Thirdly, major public companies should consider the appointment of an audit committee at the annual general meeting. I am not seeking to include a requirement that an audit committee should necessarily be appointed, but merely to ensure that at the annual general meeting the possibility of appointing audit committees should be on the agenda so that it is in order for it to be discussed. Finally, I would like to provide that auditors who are concerned about companies that are not preparing data and estimates of their current and future performance as effectively as they might can give warning of their concern to the shareholders without qualifying the accounts.

I hope that the House will agree that my objectives are quite modest. However, there are objections to my Bill in various quarters, and I should like to deal with as many of them as possible in the time available. It is objected that we have enough company law anyway—or, indeed, too much — and that existing law does not prevent companies from doing as I recommend if they so wish. It is also said that much of what I recommend is beginning to happen anyway. I accept that some of the recommendations that I hope to included in the Bill are being adopted as normal practice by British public companies; but the process is too slow and the public is entitled to insist on accelerating it.

At the back of our minds there is always the question of limited liability, which is an important privilege for companies. As they enjoy that privilege, they should also have obligations—to the shareholders in particular— which need to be clearly defined. For example, if it had 748 not been made a requirement of company law many years ago, would all companies even now be making it a practice to appoint independent auditors? Obviously, it would be regarded as good practice to do so, but I doubt whether every company would in fact appoint independent auditors if it was not set out in company law that they were obliged to do so.

Similarly, would all the companies quoted on the New York stock exchange have appointed audit committees by now, if it had not been made a requirement in the listing agreement of the New York stock exchange? I very much doubt whether they would have done so, even though the practice of appointing audit committees is much more firmly established in the United States than in Britain. In Britain, many people say that the practice of appointing an audit committee is desirable, particularly for large companies; yet the number of companies to have set up an audit committee up to now is very small. The public are entitled to expect that company law will encourage companies to follow the best established practice. It should not simply be left to shareholders to exercise pressure according to the statutory provisions now available, which are in many ways inadequate to the task.

It is also objected that my Bill requires dramatic changes to be made. That is certainly not true. My Bill may have done so when I first sought to introduce it in 1969, but every year I have tried to take account of the suggestions of colleagues and company law experts in order to improve it and make it more practical. The Bill helps shareholders to make a better informed selection of candidates for the board, and gives certain additional powers to the auditors that are long overdue. However, there are no significant new obligations in the Bill if the shareholders do not seek to intervene.

It may be said that the Bill would emphasise the importance of the non-executive directors and would tend to split the board, or would lead ultimately to the appointment of a two-tier board. I would not accept that judgment. The Bill would make the non-executive element more effectual and better informed within the unitary board. In addition, it would counter the criticism that the unitary board—the established British practice—has lost its supervisory function.

An objection that is often made to my proposals is that they place too much responsibility on the auditors. However, boards need professional advice on accounting matters, and the responsibilities of the auditors need to be clarified. They should not be confined simply to a retrospective review.

Institutions in the City have their own methods of dealing with problem companies, but it is wrong for them to make direct approaches to company boards. They then run the risk of becoming insider traders and obtaining information that is not available to the smaller shareholders. The institutions need to have an appropriate method of stimulating management which does not leave the small shareholder behind.

Those are the points that I wanted to make on First Reading of my Bill. This is the 15th year in which I have sought to introduce the Bill on the same general lines, and I have not lost my optimism that this year my Bill will go through.

I hope that the Department will now recognise that the protection of investors, particularly of small shareholders, 749 is a matter of serious concern to the public and to many right hon. and hon. Members and that, my Bill accordingly deserves to make progress.