HC Deb 18 April 1986 vol 95 cc1206-18

Order for Second Reading read.

1.37 pm
Sir Brandon Rhys Williams (Kensington)

I beg to move, That the Bill be now read a Second time.

The Bill has been introduced once again by me and by hon. Members on both sides of the House. I wish to say a few words about it and about my intentions in the succession of Bills on company law which I have introduced since 1969.

My first Bill was a complex measure, and I learned from the Committee stage which it successfully completed that if a Back-Bench Member is to make a significant contribution to company law reform it is important to recommend simple, workable and inexpensive measures. But I am convinced that it is possible to introduces minor changes in company law which are likely to have a powerful effect in improving efficiency, and that is the intention of this year's edition of my Companies Bill, which hon. Members will recognise is broadly similar to the measures which I have recommended to the House in every Session since 1970.

I have said many times that the limited liability company is one of the great creations of British genius. Like cricket, it is a British invention which has been copied in many parts of the world. It is a wonderful way of bringing together human resources and material assets in a most fruitful relationship for the creation of wealth. Like cricket, it has been copied in many countries; and as with cricket, we find that some other countries now perform better than we do in the operation of limited liability companies.

Can one improve efficiency by passing laws? That is an important issue for hon. Members to consider, because it is difficult from outside a business to see how changes in the law might make the senior management or the board of directors operate more efficiently.

There is another question of a similar kind: do we need yet more company law? I am somewhat critical of the way in which the Department of Trade and Industry has approached reform of company law in recent years. It is giving too much attention to the prevention of fraud and gross malpractice — and in so doing producing huge slabs of legislation — but is not considering ways in which the existing framework of company law—which is broadly of 19th century origin—could be brought more up to date, so that the various parties performing their regular functions in publicly quoted companies could have a clearer idea of their rights and responsibilities within a statutory framework that helps them to operate in the most effective way.

In recent years there have been changes in the environment in which companies operate which have brought greater pressure on managements to operate effectively. Some of the changes are highly commendable, and I welcome them. For instance, there is the much improved professional analysis by stockbrokers and the staff of the big investment institutions. This has undoubtedly brought pressure to bear on managements to improve performance. There is also far more extensive press coverage of companies affairs. Opening up companies' doings by coverage in the press tends to be conducive to greater efficiency.

The activities of takeover bidders are less welcome. They undoubtedly frighten boards into behaving more effectively, but they have as their aim the destruction of the company rather than its cure. The current takeover frenzy tends to make managements concentrate on producing sparkling results in the short term rather than consider the interests of shareholders over long spans of time. We are also seeing much more competitive marketing, which means that all firms seeking to enter British, Community or world markets have to behave in a more competitive way if they are to survive.

However, all those pressures can pass by companies such as those with which I am concerned in the Bill. I am thinking of companies which are beginning to show signs of decay or of declining vigour and initiative, but are not yet as obviously in trouble, as they may be in a few years time when shareholders and outsiders begin to realise that something is badly wrong. I am thinking of companies which are not as energetic and resourceful as they could well be, given the human and material assets at their disposal. In this area, minor changes in company law could be extremely beneficial without being burdensome, grossly innovatory or revolutionary.

The Bill therefore considers the position of supervisory elements within the company which are favourable to the company's success and which, quite properly, have access to confidential material. I am speaking, of course, of the non-executive directors and the auditors. Almost all public companies have some non-executive directors, and companies in this country have had to appoint auditors for a century or more. I hope that we can find ways of improving company law in minor but effective ways so that the status of the non-executive directors and the auditors is improved, and they automatically have more authority in the conduct of the company affairs, and better knowledge of the business.

It is not always clear to an outsider or to a shareholder who the non-executive directors are — or, indeed, if there are any who are strictly non-executive. It is very often company practice to appoint to the board someone who can occasionally be relied on for specialised advice, or someone who is well known to the board and to whom members of the board like to refer from time to time. Such people are not really non-executive directors. They are not aware that their role is to act for the shareholders in a truly supervisory way.

Often, board members who appear to be non-executive hold themselves available to offer specialised advice when called upon to do so, but otherwise they do not interfere in the management or supervision of the company. They might be a useful element, but they do not strictly meet the requirements that I see for the role of the non-executive director.

Companies sometimes appoint as non-executive directors people who are not particularly significant; and even if they are well known or influential, they may be unable to exercise authority for various reasons. It is worth analysing why even quite powerful figures are frustrated when they want to do something to improve the efficiency of the executive management. If they do not like what is happening in a business and resign noisily, they may damage the firm without bringing about the changes which they think necessary. They can resign quietly without a fuss, but that will probably not be noticed and their gesture will be ineffective. They could argue within the board from a minority position.

In public companies in Britain non-executive directors are usually in the minority, unlike the practice in North America; but the non-executive directors may not be effective even when they raise legitimate doubts about company policy. Or they may argue on the basis of inadequate data, in which case they will be outgunned by the heads of departments—the executives on the board who might have axes to grind over particular aspects of expenditure or management policy.

Even when there are effective non-executive directors on boards, they are not always able to give the shareholders the service that is sometimes needed. The Bill therefore requires public companies to state which directors are non-executive directors, and this is narrowly defined—that is, non-executive in the true sense. We are talking about supervisory directors who are aware of their responsibilties to act on behalf of the shareholders in the boardroom.

The Bill also suggests a minor reform of procedure governing the election or re-election of directors which would give the shareholders more discretion over the choice of candidates to fill board vacancies. Too often, when a vacancy occurs through natural rotation, resignation or death, only one candidate is put forward and he is automatically elected to fill the space. That does not always produce the best candidates for effective management.

I do not think that the suggestion that I have incorporated in the Bill — which I expect could be improved — would be used often. However, it might occasionally be relied upon, particularly by institutional investors, to bring pressure to bear on boards to improve the quality of candidates. If dud candidates were put up for vacancies on a board, the shareholders could organise themselves more easily than under existing company law to put up rival candidates, and so to promote meaningful elections to improve the quality of the board.

Mr. Jeremy Hanley (Richmond and Barnes)

In a public limited company, each director has to stand for election on a separate ticket. It is one of the privileges of a private company that more than one director can be elected on one nomination, so that the shareholders have to take directors A, B and C all together, without having to reject one. However, in a plc, each director stands on a separate motion, so some protection is afforded to shareholders in a public company.

Sir Brandon Rhys Williams

I am grateful for my hon. Friend's advice, which I realise comes from an extremely deep knowledge of company law and procedure. What I am suggesting in the Bill, which I admit could be improved, is that members of a company, who will probably be institutional shareholders, should have the right to insist that the company circulates in advance of the annual general meeting, or any meeting at which the election of directors is due, the particulars and the name of a candidate. That candidate should not necessarily be the man preferred by the board for the vacancy, but one whom the interested shareholders would wish to notify other shareholders was available for the office together with a limited amount of data as to his qualifications.

As with professional societies and many bodies which have a scattered membership which they reach through the post, this would mean that people outside the general run of company supervision would have a chance to look at the candidates and make their own selection. I doubt whether this would happen often, but the intention is that it might happen, and the fact that the names of rival candidates could be circulated in advance, together with appropriate information about their qualifications, would scare boards which were thinking of putting up unsuitable candidates — men who are too old, who have no effective qualifications to contribute to the management of firms.

The Bill also requires all public companies to prepare their data and estimates concerning the firm, and its likely future and ability to carry on as a growing concern, in a businesslike manner; and to provide the information to all the board members, including the non-executive directors. What I am suggesting is common sense and normal prudence for every company, but unhappily one finds that when companies get into serious trouble, it is largely attributable to the fact that they have been neglecting to follow the general pattern of competent businesses in collecting data about their performance, market shares and the role and attitudes of their competitors, and in making long-term forecasts of their capital position and their ability to meet their obligations as they fall due.

When the auditors detect that companies are not handling their internal management of the collection of data, comparisons, forecasts and future planning in a businesslike manner, they are frustrated because they do not have any statutory responsibility to warn the shareholders that there are doubts about the way in which the board is managing its business. I emphasise that I am not discussing firms which are acting fraudulently or criminally, but firms which are lapsing into sluggish or old-fashioned business methods, and which sooner or later will damage the investors, the customers and the work force, because the company is not making the best use of its human resources and material assets.

How do we decide whether a company is handling its internal data collection and forecasting in a businesslike way? It is futile to pass a law that all companies must manage their forecasts in a businesslike way. However, this is a responsibility that has to be shouldered by some supervisory element within the firm. The non-executive directors are not necessarily the right people, but the auditors are.

We must require the auditors to accept this responsibility. Auditors have a natural reluctance to do this work even in the minimal way that I am suggesting in the Bill. All that I am asking is that auditors should have the responsibility to warn the shareholders if, in their view, the firm is not handling data collection and forecasting in a competent manner. The Bill does not insist that the auditors should guide the firm, but simply gives them the minimal responsibility to warn shareholders if they can see that the firm is not performing this function in a businesslike way.

On the continent a hundred years ago the development of business practice resulted in the appointment of supervisory boards, so that in Germany, particularly, but also in other countries, one finds that top management is split into an executive team, which consists of the regular heads of department, and a supervisory team, which knows that its role is to look at the effectiveness of the management as a whole on behalf of the shareholders.

In this country we did not adopt the idea of a supervisory board which has the duty to look at all aspects of the running of a business, but moved instead towards the appointment of a new profession—the profession of accountancy — which would have the particular responsibility of carrying out a compulsory audit on behalf of the shareholders. I rather regret that we did not follow the German practice, which has produced a very competent business background and one which in many ways has advantages by comparison with the British system.

However, as what we have is a highly competent professional body of supervisors whose business it is to act for shareholders in looking at the way their companies are acting, I believe that we should ask those professionals somewhat to extend their responsibilities. Under the Bill they would simply have to warn the shareholders if they thought that a firm was not dealing with the collection of data and the making of forecasts as competently as it should.

Why, in particular, are auditors afraid of being asked to carry out even that limited function? It is because they are nervous of stepping outside their established statutory routines because they might incur a painful or even crippling liability if shareholders turned on them for falling down on their functions and obtained compensation for losses attributable to the auditors' negligence. We must understand the pressure that that fear puts on people in the auditing profession; but the growing complexity of business makes it essential that the supervisory element appointed by shareholders should now move a little further in the direction of management accounting.

This year, therefore, I have made what I hope is a small improvement in the Bill by introducing a new clause 6. It consists of just a few lines and is, I believe, self-explanatory. It states: The liability of any individual person appointed to act as an auditor under the provisions of the Companies Act 1985 or of any employee employed by an auditor so appointed to carry out work on an audit who shall be held liable in negligence, default or breach of duty in respect of his performance of that audit, shall be limited to a maximum of £50,000. That is a substantial sum and I hope that it will be sufficient to deter people from acting in a light headed way, but it is a figure which should also be within the capacity of most firms to insure without taking on too heavy a burden. As this is such a topical matter in the auditing profession, I hope that my suggestion—which may well be capable of improvement—will be regarded as a good subject for hon. Members to consider, perhaps in Committee on the Bill.

The Bill would apply the changes that I have described to all public companies, but among the most important recommendations in the Bill is one which I suggest should apply only to very large companies. I have incorporated a definition of a very large company, although again it is something that might well be improved. The intention is to catch the 100 or 200 biggest British companies and to follow the North American practice of appointing audit committees.

On the New York stock exchange a number of years ago it was made a requirement, as part of the listing agreement, that to qualify to be quoted on the exchange a company must have appointed an audit committee. I spent some time with, and learnt a great deal from talking to, officials of the New York stock exchange about the way in which the audit committee was to be appointed, how it should operate and the general public reaction to the appointment of audit committees.

I do not think that we should require companies in this country automatically to follow the example of the New York stock exchange, because the etiquette and the procedures are not yet sufficiently widely understood. However, I should like to find a way of giving companies a gentle annual prod in the direction of appointing an audit committee. I have found a formula which I have therefore incorporated in the Bill. I simply suggest that there should be an item on the agenda of the annual general meeting that the company must consider the appointment or re-appointment of an audit committee.

In order to make my recommendations more specific, I have taken a considerable amount of trouble to produce a schedule consisting of model regulations for the management of an audit committee. It could be a sort of addendum to table A for companies which wish to operate an audit committee. It would not be obligatory for them to follow the routine that I have suggested in the Bill, but I think that it is a businesslike start. If they want to operate an audit committee in a slightly different way, it would be entirely up to them to do so.

As the idea of audit committees for public companies is still rather unfamiliar in this country, I hope it will be found to be a useful feature of the Bill that it carries a schedule in which model regulations are set out. People who are familiar with what is normal practice in New York will recognise that I have copied many of the features from there.

If an audit committee is appointed, I conceive that it would make the non-executive directors more effective, because it would give them regular professional support from people who are independent of the executive management of the business. It would also put the auditors in a stronger position in their contacts with the board, because they would have a statutory procedure for keeping in regular contact with the non-executive directors.

I do not wish to dilate on this subject any more, although I think that it is a subject of general interest. I should like to conclude by saying why I think that the Bill is especially topical and necessary now.

I believe that it would have been good for British business if something on the lines of my Bill had been adopted 18 or more years ago when I first set out to advertise these reforms. Now, however, we are seeing the Government, quite rightly, promoting the concept of wider share ownership. This means bringing into the ownership of shares of public companies a large number of people who want to know how their companies operate. They would like to participate and ought to be given a satisfactory and worthwhile role.

I believe that the changes that I have suggested in the Bill would involve small shareholders more closely in the way in which their companies operate and give them an opportunity to express their views from time to time over such matters as the selection of the directors. It would also give the institutions ways of acting effectively on behalf of all shareholders equally, not just of other institutional investors or their own interests, without risking the accusation of insider trading.

We have the difficulty that so many of our large and influential shareholders are afraid to act except in the role of absentee landlords. If they see that something is not right with a company they do not seek to intervene, because they do not know how they can properly do so. Instead, they simply try to dispose of their holdings as quietly as possible before other investors detect the way in which the management may be allowing the business to slide downhill.

It is the lack of shareholder pressure effectively applied to management that is one of the principal causes of inefficiency in British businesses. The institutions have a responsibility to support changes in the law which would enable them to act in a proper way, and not in a way which would lay them open to charges of insider trading.

I also feel that the Bill is particularly topical because of the Government's campaign of privatisation—another development which I entirely support. We need to improve the qualtiy and effectiveness of the responsible supervisory element within businesses which may not be subject to competitive pressures and which may be too large to be assessed correctly by outsiders.

The business of supervising the executive management of a large undertaking from within in a benevolent way is something which the House should encourage. There are restraints on the way in which the supervisory elements operate within businesses at present because, unfortunately, we are allowing our company law to become increasingly obsolete.

I hope, therefore, that the Bill will proceed to Committee. On two previous occasions it has completed its Committee stage. I believe this is a useful way in which hon. Members who are interested in studying questions concerning the efficiency of business can occupy their time. I am not asking for very much time, because it is only a short Bill, but I should like it to make progress. Indeed, I should like it to complete all its stages. However, even if it only reaches a Standing Committee and does not go through all the remaining stages at this point in the Session, I am sure that it would at least attract informed attention and support in appropriate quarters outside the House. The Bill is not controversial on party lines; it has all-party support. It is not burdensome on management. I believe that it will be beneficial to all concerned with the success of British companies.

2.5 pm

Mr. Jeremy Hanley (Richmond and Barnes)

I welcome the opportunity to support my hon. Friend the Member for Kensington (Sir B. Rhys Williams). I hope that I may say without embarrassment to him that I have been an ardent fan of his and his regular annual Bill for the past 17 years. The reason is better explained if I declare an interest. I am a Fellow of the Institute of Chartered Accountants in England and Wales, a Fellow of the Association of Certified Accountants, and a Fellow of the Institute of Chartered Secretaries and Administrators.

When I qualified as a chartered accountant in 1969, my first job was as a lecturer in accountancy. One of my tasks was lecturing in company law. Every year one has to teach one's students existing law and some of the subjects that might be introduced over the coming year or two. Each year, as the law has changed, the forecast for the future has not. It has always been for audit committees, and it has always been with great respect that we have looked at the legislation proposed by my hon. Friend to the House.

My hon. Friend sometimes reminds me of Lord Denning, inasmuch as a student of Lord Denning once wrote to him, "Dear Lord Denning, Please, no more law reform. I am having trouble learning what there is." All I can say is that, with audit committees many students qualified long ago knowing the terms of my hon. Friend's Bill in its various guises. The first time that I came to the House to see a Standing Committee was to view my hon. Friend—not a Prime Minister, but my hon. Friend—discuss a Bill very much like this one in the Committee on the Companies Bill in 1978.

I support the Bill and wish that the Government would give it a Committee stage. I go further and say that I believe that the need for an audit committee in major companies has been proven time and again. In 1977 the Confederation of British Industry set up a working party and came out broadly in favour of the principles of the Bill. The CBI said: the operation of audit committees within certain companies might be an effective method of ensuring the independent review of those companies' financial activities, of improving the existing internal and external audit procedures, and of letting it be seen that these requirements were being met". The CBI's working party was opposed to statutory compulsion, but it welcomed an experiment. Soon after, the Institute of Directors similarly recommended an experiment.

Every profession is proud of its house journal. The house journal of the accountancy profession is the magazine Accountancy. No doubt the 1,000th edition of any magazine is a milestone. The fact that the editorial of the 1,000th edition cried out for audit committees shows the importance of the subject to the informed accountancy world. It was even mentioned in the White Paper entitled "The Conduct of Directors". In fact, it has been mentioned so many times that I cannot believe that it has not become law by now. In the United States audit committees have become compulsory in New York. Therefore, I should spend a few minutes saying why I believe that audit committees should be introduced.

Audit committees can made a substantial contribution to helping directors fulfil their responsibilities. They can help directors to understand, perhaps from a different point of view, the way in which financial matters should be assimilated and then given to shareholders. They strengthen the role of non-executive directors. In the Bill, my hon. Friend expands upon the role and position of non-executive directors, and there is nothing more anomalous in existing company law than the fact that it makes no distinction between executive and non-executive directors. A difference should be drawn.

The third advantage of an audit committee is that it strengthens the objectivity and credibility of financial reporting. The board would be more answerable to each of the various specialists within the board and a specialist within the board would have to answer to an independent committee of his peers rather than merely to the clique that so often exists in some companies.

Fourthly, an audit committee would strengthen the independence of the audit function, and not merely the external audit function, but the internal one as well. An audit committee could choose the external auditor rather than that auditor being hired through some old boy network. I am not saying that that occurs much, but it is common for a chief executive, when moving from company to company, to take with him the firm of auditors with which he has built up an understanding and relationship. I am not saying that that reduces independence, because honourable people will act honourably, but it will help independence to be seen to be done if the auditor can be chosen by a fully independent audit committee. That would lead to greater control over the chief executive.

The fifth advantage is that an audit committee would improve the quality of the audit and accounting functions, in that an independent committee of the board is more likely to be able to see what is wrong with the internal functions of a company. A sort of paternalistic pride goes with setting up an accounting organisation within a company, and it is sometimes difficult to be detached enough to see that it is ineffective. If one works full time in a company, it is often difficult to have the experience to see what is actually happening outside. The ground shifts and systems change, and the future for that company may well be in progress which cannot be seen internally.

The last advantage of many that I could mention is that it improves communication between directors, auditors and the management of a company. It helps everybody to understand his role. The consultative committee of the accountancy bodies said that any audit committee should contain at least some of the following matters. It should contain a majority of the committee's members, including its chairman, and the majority should be non-executive directors. The chairman of the committee should also be non-executive. It said: the establishment of a committee should not reduce the collective responsibility of the whole board for financial … matters". Indeed, it said that the committee should be totally non-executive.

The first of the only other two points that it makes and which I should like to mention is that the committee should be required to review at regular intervals the internal control system of the business. That is something that many executive directors find they have a little time or desire to do. The other recommendation is that the committee should meet the external auditors at least once a year, and that whenever the external auditors consider that a matter should be brought to the attention of the board of directors, it should be discussed.

The discussions between external auditors and directors should not merely take place in the office of the chief executive or the chief accountant, but should be open within the ambit of the audit committee. The remaining desirable features are helpfully set out in the appendix to the Bill about which my hon. Friend has spoken. I assure my hon. Friend that, because the appendix is not covered by copyright, it will be seen by thousands of future students and I hope that I have his permission to plagiarise mercilessly. It will certainly save me some trouble in the future.

Another point about audit committees is that in the United States, where they have been compulsory on the New York stock exchange since 1978, they have proved to be a success. I know a number of non-executive directors who serve on audit committees, and they felt that those committees have brought real accountability to the companies.

Audit committees have not been established under law because there are some disadvantages. It is argued that they split the board, that they would be seen to be cheating on themselves, that they would be seen to be ferreting for information to try to catch the chief executive out. I disagree. Splits already occur in boards. The point about an audit committee is that it can be properly and fully informed about matters on which non-executive directors are often not informed. Non-executive directors bring experience from outside. Such committees would help them to gain greater information about the internal workings of the company which they are trying to assist.

Another disadvantage, it is said, is that audit committees tend to pre-empt two-tier boards. I know that the Opposition support the idea of two-tier boards, whereas we do not. That argument is irrelevant, however, as the committee would be a sub-committee of a main board and therefore able to exist by itself. Another disadvantage, it is suggested, is that audit committees would encroach on management responsibilities. On the contrary, they would be supervisory of, and helpful and an independent source of advice to, management. I believe that management would be proud to work in an environment in which its skills could be recognised and rewarded properly.

It is argued that audit committees would be powerless if they could not enforce the recommendations or the report to their shareholders because they would not have executive power. I can think of nothing more powerful than an audit committee, by statute, insisting that its report be given to shareholders. That is an important element to build into the Bill in Committee.

One of the Government's major criticisms is that audit committees are not practicable in the United Kingdom because there are not enough non-executive directors to serve on them. I submit that we have not tried to find out, In an environment in which 35 per cent. of The Times top 1,000 companies have fewer than three non-executive directors and 25 per cent. have none, it is difficult to discover who would be able to put himself or herself forward.

One of the Government's criticisms of audit committees is that they smack of quangos. They suggest that the big companies, which my hon. Friend suggests should have audit committees, are exactly those which do not need them and that therefore to have an audit committee would be to have a quango forced on a company which is trying to be efficient. That argument is not valid, and I suspect that the public would not think it valid either.

Audit committees would cost a little more, but savings would flow from better management of internal systems. I believe that they would be extremely effective. The experiment in America, on which we can draw, has proved their need and worth. The Government ought to introduce an experiment in the larger companies, although I should like all public companies to submit themselves to audit committees.

That might be a dream, but I should like to conclude by drawing on my hon. Friend's analogy. He said that limited liability companies and cricket have a lot in common. Following the recent performance of the England team in the West Indies, I suggest that he is wrong. It is not limited liability, but limited ability, that worries us. It is not enterprise and expansion, but liquidation, about which we must be concerned. I strongly hope that the English team is not wound up. I believe that it needs an independent committee to which it can refer, and I should like my hon. Friend to serve on it.

The Bill is worthy, and has been for 17 years. I hope that the Government will give it a fair hearing.

2.18 pm
Mr. Bryan Gould (Dagenham)

I pay tribute to the hon. Member for Kensington (Sir B. Rhys Williams), who has mounted a long and persistent campaign to draw the House's attention to an important matter. He and the hon. Member for Richmond and Barnes (Mr. Hanley) have shown that they believe that there has never been a more propitious moment for that 17-year-long campaign to reach fruition.

There is an undoubted and growing anxiety about how corporate affairs are monitored. That anxiety manifests itself in many ways, such as anxiety about how corporate bodies are supervised, and proposed Government action on the role of auditors. Concern was expressed in our deliberations last session on the Insolvency Act about the way in which the privilege of limited liability can be abused. There is currently concern, through the work of the House on the Financial Services Bill, about the protection of investors, particularly in corporate matters. I am glad to say that all that is backed up by indications from the Government of increased practical action to enforce the existing rule for the filing of annual returns and so on.

There will surely be a general endorsement of and welcome for the principles that underlie this Bill. One of the features that distinguishes to our disadvantage our system of doing things from that of rather more successful economies is that we have less disclosure and availability of information about the affairs of companies than is the case in, for example, the United States. We need that greater availability and a more efficient means of controlling, monitoring and supervising the financial administration of companies both in the interests of the investors and also of the efficient administration of companies and the business sector as a whole.

The preoccupation of the hon. Member for Kensington could accord very well with that increasingly held perception that limited liability—although I am happy to endorse the encomium by the hon. Member for Richmond and Barnes (Mr. Hanley)— is a privilege that carries with it commensurate responsibilities. We are quite entitled to look at the way in which those responsibilities are discharged.

The Bill is a modest provision. The hon. Gentleman has wisely stopped short of including any mandatory measures. All it does is invite companies to set up audit committees if they so wish and to rely on a statutory provision notwithstanding anything in their own articles. That is probably the right way to proceed. We can all accept that audit committees, despite arguments against them, would be a valuable step towards making information more readily available.

I have one slight cavil about clause 6. The hon. Member for Kensington has rightly identified a problem of pressing current concern. Accountants and auditors are increasingly worried both about the scope of litigation that they face in this and other jurisdictions and about the increasing difficulty of ensuring adequate insurance cover against awards and damages. Thus, the hon. Gentleman is right to direct attention to the problem, but I am concerned whether he has found the right solution.

I am not sure whether I know the right answer, although I have seen a range of possible answers, including limited liability. I believe that in clause 6 the hon. Gentleman may have gone for a solution that is a little odd. If we get to Committee, we can assess whether there might be different ways of limiting liability or in other ways meeting the real concerns of the accountancy profession.

The hon. Gentleman is right to say that there is great concern about the level of fraud in corporate and other financial affairs and undertakings. However, an equally important matter to which we should devote attention is to ensure that the law in this field is properly drafted so as to secure the effective administration of our corporate undertakings. This Bill can contribute usefully in that direction.

2.24 pm
The Parliamentary Under-Secretary of State for Trade and Industry (Mr. Michael Howard)

It is an agreeable although somewhat challenging task to have the duty of replying to my hon. Friend, the Member for Kensington (Sir B. Rhys Williams) who once again has brought before the House a Bill to amend company law.

My hon. Friend's campaign on this matter has indeed been long, and I am sure that he has broken many records for such a campaign. I wish to join other hon. Members in paying tribute to him for his persistence and determination in waging that campaign. He has been reinforced on this occasion by the advocacy of my hon. Friend the Member for Richmond and Barnes (Mr. Hanley) who takes a close and constructive interest in these matters and who made a number of intelligent points, as did the hon. Member for Dagenham (Mr. Gould) in his brief but characteristically eloquent contribution to the deliberations of the House.

Since my hon. Friend the Member for Kensington began his long campaign—some 17 years ago—there has certainly been no lack of companies legislation, both in response to changing circumstances at home and to implement our European Community commitments. Without any attempt at producing a comprehensive list, I can site the Companies (Floating Charges and Receivers) (Scotland) Act 1972, section 9 of the European Communities Act 1972, the Companies Act 1976 the Insolvency Act 1976, the Companies Act 1980, the Companies Act 1981 and the Companies (Beneficial Interests) Act 1983, all of which—and more—have now been consolidated.

In addition, as my hon. Friend the Member for Richmond and Barnes knows particularly well, we have the very important Insolvency Act 1985. The Financial Services Bill has received its Second Reading and has been considered in Committee. There will be secondary legislation later this year to implement the third and sixth company law directives. Thus, there has been and will be no shortage of companies and related legislation. There are times when I echo the views of those who argue that there is sometimes a little too much. Indeed, my hon. Friend recognised the existence of this disenchantment in a speech on an earlier, somewhat similar, occasion in 1982.

It might therefore be convenient if I describe briefly the Government's general approach to proposals for change in company law. It is based on the following considerations. First, proposals for changes must be based on more than theoretical arguments. There must be a demonstrable need for change with a marked balance of advantage over disadvantage. We are most concerned to avoid placing new burdens on industry and commerce, unless there is a strong case for additional protection for creditors and shareholders.

Secondly, because of the risk of promoting legislation which is technically defective, wherever possible such legislation should be preceded by thorough and extensive consultation with interested parties, including the professions. Thirdly, although inevitably there are occasions when the national interest requires the views of particular interested parties to be given less weight than they would wish, it is important as far as possible to attract the support of interested parties for proposed changes.

I fully understand that the intention behind my hon. Friend's proposals is to improve the efficiency of British business by arresting what he believes to be a long-term decline in the effectiveness of shareholders and the efficiency of directors and managers. The question is whether the proposed changes are necessarily the most effective method of achieving that objective.

I shall look in detail at the Bill's proposals. They fall under five separate heads. First, the directors' report of every public company shall state which of the directors is a non-executive director.

Secondly, every public company shall circulate a list of candidates for election as director 21 days before the meeting at which the election will take place. If a candidate so requests, the company must circulate a statement of not more than 200 words describing his qualification for election. The list of candidates shall specify those who are seeking nomination as non-executive directors.

Thirdly, the agenda for every annual general meeting of a major public company shall include, as a separate item, the consideration of the appointment or reappointment of an audit committee of the board. The Bill goes on to set out in some detail how such a committee would be constituted and provides a set of model regulations for such a committee.

Fourthly, the directors of every public company are required to produce, at least once in each financial year, such data and estimates about the company's business and estimates of its future business as will allow a reasonable assessment to be made of the company's ability to carry on business as a going concern and to pay its debts as they fall due. Such data and estimates must be provided to the company directors, the company secretary and the auditors, who, if in their opinion the requirements have not been complied with, must say so in their report.

Last, but by no means least, the Bill limits the liability of any individual appointed as auditor, or of an employee of an auditor, to a maximum of £50,000 for negligence, default or a breach of duty.

Four of the proposals concern activities of the board. Three would be mandatory — those relating to the identification of non-executive directors, the circulation of details of candidates and the preparation of data and estimates. The fourth, that relating to audit committees, would be voluntary. I shall come to the final proposal, that relating to the liability of auditors, in due course.

I have to say that, in the Government's view, the first, four proposals would not, either taken singly or together, have the effect that my hon. Friend hopes to achieve. There are advantages in the appointment of non-executive directors to public limited companies, particularly those which are quoted on the stock exchange, who are able to make—

It being half-past Two o'clock, the debate stood adjourned.

Debate to be resumed upon Friday 25 April.