HL Deb 07 July 1966 vol 275 cc1229-45

5.33 p.m.

VISCOUNT HANWORTH rose to ask Her Majesty's Government whether, before dealing fully with the recommendations of the Jenkins Report on Company Law Reform, they will consider what further measures could be taken to provide an environment in which companies would be encouraged to work not only in the interests of their shareholders but also of their employees and the nation as a whole, having particular regard to the importance of exports and the needs of the consumer. The noble Viscount said: My Lords, this is a very broad Question, and I am not aiming to suggest any solutions to the problems I have raised—at any rate, no detailed solutions. Nor do I believe that there are any useful universal panaceas; if there were, I am quite sure that whichever Government had been in office they would long ago have found them and done something about them.

Perhaps this Question suggests a philosophy, and I believe this philosophy lies somewhere between the two extremes; the one, of course, being nationalisation continued into almost every area—which I do not believe that anybody thinks is practical at the present time—and the other extreme philosophy, the turning back to the industrial climate of the nineteenth century. This I think would be standing against the tide. It is an impossibility and cannot lead to any useful results. This nation and every nation is dependent on its industry, both to supply some of its own needs and to provide foreign currency by exports. In the nineteenth century it was held that the natural economic environment would automatically provide the incentives and restraints which were necessary to ensure that everything worked out for the best, at any rate in the long run. Many people then considered that it was wrong and ill-advised to interfere with this process of natural selection. But, my Lords, let us be quite clear that even in those days artificial restraints and incentives, quite apart from the industrial climate, did exist. They have now become hallowed by tradition and we often forget that they are very much the same in a small way as exists in industry to-day.

To-day such a degree of freedom is no longer practicable; we cannot accept the misery caused by unassisted redundancy or large-scale unemployment. It is at least questionable whether the inefficient company does not survive too long. It is even more doubtful whether, with the increased power of advertisement and high import taxes, the consumer in fact gets what he really wants. I am afraid that, whether we like it or not, the increasing complexity of the modern economy makes more central control an inevitable trend. We can see its necessity for many purposes; for example, to encourage industry to move into depressed areas, or to try to control monopolies and to prevent the ruination of our cities and countryside by unrestricted building. I am giving only a very few examples, but we all know these restraints, which in the past were perhaps not necessary, are essential to-day in a more complicated economic situation. However, unless or until computer techniques have been developed to a point far beyond what now seems practical, most of the decisions must—and perhaps always should—bemade by industry itself and they will, of course, be made in terms of the incentives and restraints which their environment provides.

For these reasons, I would ask the Government to look at this environment from a very broad viewpoint and consider whether, by altering some of the incentives and restraints, it may be possible to avoid further palliative measures which are designed solely to curb actions which are not in the national interest. One example of that, of course, is the Monopolies Commission; but I am not suggesting for a moment that we should do without it. It was designed to put a curb on industry and to halt certain abuses which, by the very fact of setting it up, we admit are going on and will continue to occur.

The first and probably the most intractable difficulty is that the company's legal obligations are almost solely to their shareholders. On these grounds, in theory at any rate, they are justified in operating on the highest profit margin which the market can bear and in paying the highest possible dividend to shareholders. I agree with the views put forward by the noble Marquess, Lord Salisbury, in a recent debate. He said that a company must now be thought of as a partnership between the shareholders, management and other employees. Only by moving in this direction can employers hope to get a good working relationship with labour and a modernisation of outlook from trade unions.

There are many things which can be done to help in that direction, and I do not believe that any one of them alone will produce the result. Once we have established that this is the direction in which we want to move, it will be a slow process, and several different methods will have to be used to attain this end. One obvious one, which has been mentioned in the papers recently, is the granting of staff status to manual workers; and this I would very strongly commend to those who are thinking about this problem. I also think that on these grounds, if for no other, some effort ought to be made to discourage companies paying excessively high dividends once the risk taken on capital has received its due reward. I do not believe that we can ask the worker, the employee, to show restraint in his wages if he sees that all the profit is going for the payment of excessively high dividends. I know, of course, that it is a question of what the shares are worth on the market, and that unless you are a founder of the company, or have owned the shares a long time, your profit is not likely to be excessive. But I think that this is wrong in principle, and I do not believe it will ever be possible to make the man in the street feel that this is wholly fair. After all, what I have suggested was merely to discourage the payment of excessively high dividends, and this can be avoided without difficulty by capitalisation.

The level of advertising for many goods is far above that required to inform consumers about the types of goods available, and very seldom is it of a really informative nature. In fact, it has been said that although you cannot fool all the people all the time by substantial expenditure on advertisement, you can usually fool them long enough to replace indefinitely one bad product by another bad product. This state of affairs gives dubious orientation to some economic growth. Moreover, money spent on advertisement is wholly unproductive. I would suggest that, in spite of the difficulties, a graded tax on advertising should be very seriously considered.

Two recently introduced measures, one for redundancy compensation and the other the capitation tax, are interesting, because they are clearly capable of altering the environment under which companies work. The first by itself would tend to discourage companies from reducing their staff, whilst the second can have precisely the opposite effect. There are many other methods of affecting the industrial climate—for example, tax concessions on the purchase of new equipment. Major spending departments can do a great deal in the direction of improving efficiency and the quality of goods by means of mandatory provisions in their contracts. This has already been done in the case of developments contracts, where the insistence on programming by such systems as PERT has had important effects. I do not think that the Government should shrink from taking any such measures as would be likely to effect improvement—for instance, in the machine tool industry where the viability of a large number of small firms is highly questionable. I am sure that these and many other possibilities have occurred to the Government Departments primarily concerned, but I very much question whether much attempt has been made to look at such problems as a whole from a broad enough viewpoint.

I turn to matters more within the province of the Companies Act. There are many cases where the ability to form a limited company is being used solely as a means of reducing income tax or as a method of defrauding the public without incurring personal liability. The number of small companies being formed has greatly increased in the last few years and many of them do not survive. I should have thought this an unhealthy sign and that up to a certain size of enterprise there is no reason why the directors should not remain financially responsible, by insisting that the company be unlimited or guaranteed by the directors. In any case, the £100 which is now required seems an entirely inadequate sum on which to limit the liability. This was fixed many years ago and has not been altered.

As I said earlier, a consumer is often unable, without legislative assistance, to enforce his wishes or stop practices which are against his interest. One such practice, which was mentioned in your Lordships' House recently, concerns guarantees. Many of these take away the buyer's rights under the Sale of Goods Act, which include not only replacement of defective parts, but the labour charges and consequential damages. It is very seldom that the guarantee covers a period which is greater than the courts would consider reasonable under the Act. What this guarantee usually gives is nothing at all, except possibly a certain amount of convenience in so far as one does not usually have to sue for one's rights. I hope, incidentally, that one would not have to in other cases, but it does appear more likely.

I suggest that legislation to remedy this state of affairs would not only help the consumer, but provide a positive incentive for some manufacturers to improve the quality and reliability of their goods. I feel that to-day the consumer is not able to make his views and wishes as easily known as he did in the past. There are several things that could be done to improve his position. I believe that this increasingly will effect an improvement in industry, because although the consumer in England, if he cannot get what he wants, may just have to "lump it", and is prepared to do so, when it comes to exporting these goods people abroad have no such illusions, and if the goods are not suitable they will not accept them.

What I would say, in general terms, is that anything we can do to strengthen the consumer's voice is well worth doing. I would mention, for instance, schemes for informative labelling and for further consumer education. In both cases, I declare a slight interest. In conclusion, I should emphasise that, though I am in favour of free enterprise, I do not believe it is practicable, either politically or morally, to return to a state where free enterprise alone can achieve the results needed in this modem day and age. Let us make no mistake: if freedom of enterprise is our aim, it will be able to continue only if we are prepared to alter the control and environment affecting the entrepreneur.

5.46 p.m.


My Lords, the noble Viscount, Lord Hanworth, has raised a question of importance and of far-reaching implications. I agree with a great deal of what he said, but I want to approach the question from a rather different point of view. I suppose that I should declare an interest, in that I am chairman of a public company. I want to take as my starting point the fact that the Jenkins Committee was set pitifully limited objectives. The Cohen Committee in 1943 was asked to review Company Law and the "safeguards afforded for investors and for the public interest". The terms of reference of the Jenkins Committee excluded the public interest. The result is that the Report and recommendations of the Jenkins Committee deal exclusively with the relationship between directors and shareholders and with the protection of investors and creditors.

Shareholders are, of course, an essential component in a corporation; but they are only one among other factors involved; they are only one of the parties that need protection. As the noble Viscount, Lord Hanworth, implies, there are plenty of people other than shareholders with a stake in companies: the customer and the consumer; management and workers, who sell their skills and labour; and the nation, who, by law, have put their trust in the corporations by providing the device of limited liability—which, incidentally, at the time of its origin over one hundred years ago was described as "a rogues' charter". The Jenkins Committee has considered none of these.

The noble Viscount, Lord Hanworth, has spoken about providing an environment in which companies would be encouraged to work not only in the interests of their shareholders but also in the interests of their employees, consumers and the nation as a whole. But I do not see how any environmental ploys will or can achieve the noble Viscount's objectives so long as the only members of a corporate company are the shareholders and so long as directors are, in law, accountable only to the shareholders.

However much the Government may decide the social and economic objectives and priorities of this country; however much they can influence the situation by their powers; however much they may forge new Socialist economic weapons, the fact remains that the economic performance of the nation still largely depends in practice upon the actions and decisions and competence of thousands of individual company directors and executives and businessmen.

It is nowadays fashionable to say that management must manage. That is true enough. And it is fashionable to say that responsibility lies firmly with management. But the problem is: to whom are managers responsible and for what are they managing? The law says that the interests of shareholders are paramount. Conscience and common sense tell the managers that they have responsibility to their employees—and surely to their customers and to their country as well. The trade unions can justifiably take the view that if the job of management is to maximise profits for shareholders, the job of the unions is to maximise wages and conditions for their members. The Government tell management to try to hold an incomes line, to keep down prices and to export. Faced with this confusion of objectives and loyalties, torn between law and common sense and conscience, how on earth can we expect managers to move confidently and vigorously forward in the battle for the British economy?

The implication of the Question of the noble Viscount, Lord Hanworth, is that Company Law must be reformed in the context of economic and social policy. These two are too often kept apart, whereas they are indivisible. Surely, my Lords, what is needed is a completely new look at the corporation, not simply by lawyers and City experts. The resources of the social sciences, of management and of trade unions must be brought to bear on the future of the corporation. The new thinking that is going on in other countries should be studied and compared.

I do not believe that the Jenkins Committee is a starter. I would urge upon the Government that the least they should do is to set up a new inquiry, including in the terms of reference, first, the reintroduction of the public interest, as in Lord Cohen's Committee, and, secondly, the examination of the desirability, possibility and means of making employees, as well as shareholders, members of the corporation, with rights and duties. It really is extraordinary that the worker's place simply does not exist in company law at the moment. And in a fully employed society, unless we establish the worker's place, how can we expect a sense of participation and co-operation? Without these, investors will not get profits, customers will not get service, and the country will not get the efficiency, productivity and economic growth that are so desperately needed. I am not suggesting that inquiries or laws can change the nature of shareholders, managers or workers, but simply that new company legislation should be backed by new inquiry instead of being grafted on to dead stock. What I myself should really like to see is enabling legislation which allowed and encouraged progressive companies to experiment, with the law on their side, in new forms of shared objectives in corporate enterprises.

Finally, my Lords, I am not decrying the role of the corporation in our British economy and society, or criticising the activities of my fellow businessmen. I am simply saying that, unless our responsibilities and objectives can be freshly defined, and the laws changed to take account of present-day social and economic realities, we shall not be able to deliver the goods (in any sense) that the nation needs of us.

5.53 p.m.


My Lords, I am sure that everyone in the House would agree that we have listened to two most interesting speeches, and we have good reason to be grateful to the noble Viscount, Lord Hanworth, for introducing this, on his own admission, very wide subject and dealing with it so lucidly. Indeed, it is a pleasure also to listen to the noble Lord, Lord Campbell of Eskan, with his broad experience of operating successful companies to add to his wise speech to us this afternoon. However much the State may try to arrange things, we in this country, in the end, are always dependent upon the social impulses of the men who are at the top in affairs, whether they be affairs of State or affairs of industry and commerce. I think it is particularly interesting to see how already the directors of many of our leading companies are saying that they are fully aware of their social responsibilities, not only to their own companies, but to the nation as a whole.

In your Lordships' House in October, 1960, there was a most interesting debate upon the responsibilities of management—and here, although I may use the word "management", I should like to draw a distinction between the managers who manage and the directors who direct, because there is an important distinction in this matter. Several noble Lords then expressed views with which I am sure the noble Viscount, Lord Hanworth, would agree to-day. There was, for example, the noble Lord, Lord Sinclair of Cleeve, who said that, on the whole, management to-day regards human relations more as a responsibility than it used to do. He went on to say: Most firms are careful to see that the importance of the human factor is effectively recognised by all grades of management. In the same debate the noble Lord, Lord Citrine, paid his tribute to the recognition of public accountability by industry.

A great deal has happened since 1960, and, indeed, a good deal of research work is now going on in this rather difficult field—difficult because it cannot be precisely quantified. Last year, P.E.P., under Mr. John Pinder, started a three-year project, the title of which was "The Role of the Company Boards" including directors' "social responsibility" in taking decisions. Earlier this year the Industrial, Educational and Research Foundation, under the chairmanship of Mr. J. A. E. Reiss, undertook a long cool look at industry under such headings as "Responsibility of Private Industry", "Uses of Power", "Business and Morality", "The Future of the Board" and "Government Plans and Private Industry". I thought that your Lordships would be interested to see that a great deal of work is going on among various bodies in this particular field. I hope that if the Government choose to follow the advice of the noble Lord, Lord Campbell of Eskan, and set up an inquiry, they will at least take into account the amount of work that is being done in this important field.

I should like to refer to the work which the Institute of Directors does (and here I declare an interest, in that I am a member of the Council of the Institute), because I know that it takes seriously this issue of a director's duties. The noble Viscount, Lord Chandos, when President of the Institute, said in one of his speeches: I do not think that even for a moment should we allow ourselves to forget that we have the greatest responsibility for the people whom we employ and for their continuing happiness. Earlier in the same speech Lord Chandos said that the first duty of a board of directors was to look towards the continuity of employment of everyone on the company's books. He said: That is not money grabbing, nor a fatuous statement. It is something which I profoundly believe. And he speaks with all the experience, not only of a former Cabinet Minister, but also of one of our industrial leaders.

Perhaps I might also make the point that the director has no greater, but no lesser, duty to the State than that of any other citizen. I believe that he can best render this duty by making his company prosperous. If a company is not prosperous, it is not much use to the employees or to the consumers, whether the company has been supplying good goods or shoddy goods, whether the advertising expenditure has been too great, in Lord Hanworth's view, or not great enough. He must accept that neither he nor his company can exist at maximum profitability in a vacuum. No enterprise is insulated against the general state of the nation's economic health. The director may well, therefore, see it as his duty—a self-enlightened duty perhaps—to fall in with Government policy on, for example, certain matters which may be unpallatable to his company—say, on the redistribution of industry, or the setting up of a second factory in another part of the country a long way away from its main enterprise. But, of course, the director must weigh carefully the pros and cons, and the advantages to the country as against the disadvantages to his company; and he must make the correct decision in the interests of the company, while taking into account the interests of the State. In any event, as the director is responsible for his company, it must be he who in the final resort makes the decision calculated to ensure the success of the company.

I mentioned a moment ago that a director can decide to fall in with the wishes of the Government. It is important to notice to what a great extent now the leaders of industry and commerce provide members of committees of inquiry, and very often, chairmen of important inquiries and commissions, as well as making available for temporary normal Government service some very excellent businessmen and technologists, particularly for the Ministry of Technology and for the Department of Economic Affairs. I should like to mention one or two names. The noble Lord, Lord Fleck, Sir Harry Pilkington, Sir Paul Chambers, Mr. Reay Geddes, Sir Donald Stokes, Mr. Scamp, Sir Frank Kearton and Lord McFadzean, are but a few of the names who have been associated in recent years with important Commissions and Inquiries. They have fulfilled some of their social reponsibilities, sometimes giving more of their time, knowledge and experience to the State than to their own businesses

I accept fully that in this country of ours there is always need for improving practices which were innocent when they began but which turn into abuses, and it is for the State at the right time to intervene and check these abuses. The noble Viscount, Lord Hanworth, referred to the Monopolies Commission. I would not go so far as he did and suggest a graded tax on advertising. I should like to see fewer taxes, not more. I am disinclined to agree with him that dividends are excessive to-day. Indeed it is very hard to find the money to pay the dividend, with the new taxation arrangements. But this is not an occasion to take a Party line. This is an occasion to welcome a most interesting debate, and to say that I am sure that the vast majority of those who are responsible for British industry to-day are fully alive to their social responsibilities, and particularly to those of the community.


My Lords, may I make myself clear? I was referring to excessive dividends on the nominal capital, not to the yield.

6.2 p.m.


My Lords, I would join with the noble Lords, Lord Campbell of Eskan and Lord Errol of Hale, in an expression of thanks to the noble Viscount for initiating what is a short, but very interesting, debate. My only regret is that at this time of night it will not receive the same publicity as no doubt the previous debate will receive in the Press to-morrow.

The noble Lord, Lord Campbell of Eskan, put his finger right on the problem. It is how, in a democracy, particularly in time of peace, we can harness the energies, the enthusiasms, of the nation as a whole in developing the economic strength upon which all our social well-being depends. In time of war we all accept regulations. You are almost considered a traitor if you try to find some way round a regulation during war time. Yet in peace, although a nation may be facing a moment of equal gravity, the country naturally resents any form of regulation. It will accept it, but in its heart it really resents it. I think this is probably one of the difficulties which has arisen within certain sections of the trade unions in regard to prices and incomes—there is this natural resentment to control.

I think the noble Viscount was right when he said that we must now accept that we shall have to live, and continue to live, under what one might call a controlled economy. There will have to he a basis of restraint. I hope that in due course the restraint will be relieved, and that we shall be able to put more emphasis upon incentives. During their period of office since 1964 the Government have imposed certain restraints. These are all for the short-term issue of balance of payments. However, at the same time they have laid before Parliament, either in White Papers or in legislation, fairly sweeping measures in the incentive field, most of which will show results only in the long term. I will come back to that in a moment.

I believe that the environment about which the noble Viscount was talking will not be produced by legislation. It is true that legislation may remove certain of the major problems in particular spheres, so far as the workers are concerned: redundancy payment; relief from unemployment that arises naturally by the decline of an industry, and the legislation needed to protect the worker because of the increased use of machines. But in essence, the environment can come only from an acceptance by all persons within the community of certain needs and certain actions. This, of course, depends to a great extent on the Government continually putting before Parliament and the country, whether by speech or by other means of communication, what are the broad policies, what are the ends, and how those ends might be achieved. I agree with the noble Lord, Lord Erroll of Hale, that it is not only a responsibility of Government, but a responsibility of the Institute of Directors and national repretatives of directors of companies. It is the responsibility of the Trades Union Congress as the overall co-ordinating body of the great trade union movement of this country. I should have thought that this view was growing apace.

I agree with the noble Lord, Lord Erroll of Hale, that many managers, many directors, are playing an important part in discussions with Government. It is true that this Government have undertaken a greater dialogue with both sides of industry than perhaps any Government in peace time in this country. We are making great use of the "Little Neddies" and the organisations set up to help particular industries. We have regional development organisations composed not only of directors or trade union leaders but of men and women from a fairly broad section of life. This is all to the good. I believe this is the way that we shall obtain the environment to which the noble Viscount referred. Your Lordships will have before this House the Docks and Harbours Bill, the Industrial Development Bill and, shortly after the Summer Recess, the Industrial Reorganisation Bill. All these measures are in the broad-term strategy of the Government, and I think they will he generally welcomed by industry.

The noble Viscount mentioned excessive profits. I suppose that whether profits are regarded as excessive depends upon who receives them. My experience is that few shareholders regard dividends as excessive, although some workers may take a different view. But this matter will be dealt with, as the noble Viscount will be aware; and no doubt the noble Lord, Lord Erroll of Hale, will be very much involved. We shall have in this Parliament a Bill dealing with prices and incomes. Excessive profits may well disappear, because higher profits arise, I suggest, only if prices are not reduced when they could be reduced by higher productivity and higher efficiency of the company. Those prices can be referred to the Prices and Incomes Board, and there is no doubt at all that the possibility of such a matter being referred to the Board—the mere possibility of it—is sufficient for the company to think otherwise. There are clear cases where companies have changed their minds very rapidly at the mere suggestion that their price increases should be sent to the Board.

As the noble Lord, Lord Erroll of Hale, is no doubt aware, the question of dividends will be submitted to the Prices and Incomes Board. The noble Lord is a fair man, and I do not think he will disagree that if we are to have a Board to examine the prices and incomes of persons, it is only right and proper that all forms of incomes should in some way be included in this examination. I am quite sure that when this Bill comes we shall have the support of the noble Lord.

In regard to obligation to shareholders, the Companies Bill which was introduced in the last Parliament provided for further disclosure of information to the shareholders. I think this is a very good thing. I should not like to say that this Bill will appear in this Session: it may well do. But I will say to the noble Viscount and also to my noble friend Lord Campbell of Eskan, that if it does not appear in this Session they may be a little happier because of this delay, because in fact it may be somewhat broader and may meet some of the criticisms which I know were expressed among the more radically-minded Members of Parliament that the previous Bill was perhaps too limited. It was so limited, in fact, merely so that it could be fitted into the time-table of the last Government. I give that degree of comfort to my noble friend Lord Campbell of Eskan. I will certainly pass on his suggestion of a further inquiry, although personally I do not think at this stage it would be right. The Jenkins Report was exhaustive; it took a good deal of time to produce, and if we were to set out on another long road of inquiry into Company Law I think it would be difficult to proceed, even on the limited basis of the February Bill. However, we will wait and see.

In regard to advertising I would not agree with the noble Viscount, Lord Hanworth, that advertising is not productive. I have had some experience in business. It is quite clear that if you are to sell your goods you must make the public aware of them, and advertising is the only means I know by which you can do that. Therefore in that sense advertising is productive. It is perfectly true that in certain fields which spring to most people's minds (I will not mention them) advertising is probably excessive and could well be reduced.

This question was considered by the Committee that was set up by the Labour Party under the chairmanship of the noble Lord, Lord Reith, and while that Committee recognised that there may be cases of excessive advertising, they could not see how we could legislate for it—for instance, in regard to the method it takes, or some other form of limitation—because there are other ways of promoting goods which would involve expenditure to the company, and therefore a higher price of the article, than mere newspaper, television or hoarding advertising. We know that there are many promotional gimmicks, such as putting toothbrushes into packets of soap, which most people regard as being a complete waste of time and money; but one has to take it. It might well be that if we put a limit on newspaper advertising we should be supplied with more of these unnecessary and wasteful gimmicks. But we shall certainly watch advertising. As the noble Lord knows, the tobacco industry has accepted a voluntary restriction on its advertising, and I think this is something on which the Government may initiate a discussion. But it is more for the realm of the "Little Neddies" to decide whether, within a particular industry, the amount of money being spent on advertising is, in fact, necessary.

The noble Viscount, Lord Hanworth, also raised the question of small companies and thought that companies with a capital of £100 should not have a limited liability. This question has been carefully considered, and the Government took the view, as was shown in the February Bill, that it would be better not to set a limit and thereby prevent small companies from having that limited liability, but to do at least two things, the first being to remove the old exemption by which small private companies need not publish their accounts. I think that if small companies were required by law, as the bigger corporations are; to disclose their accounts once a year there should be sufficient information for companies and banks wishing to make cash advances to them. In fact the Jenkins Report rejected the suggestion made by the noble Viscount but, we did accept one of the proposals contained in the Report; namely, that the registration fees of these companies should be raised.

I have already referred to the suggestion made by my noble friend Lord Campbell of Eskan that there should be a new inquiry. I will see that his remarks are passed on to my right honourable friend the President of the Board of Trade. It is true that the Jenkins terms of reference were fairly limited. I do not know whether the noble Lord, Lord Erroll of Hale, should have risen in defence, because I am not sure whether he was at the Board of Trade, when the Jenkins Committee was set up. As I say, it is true that the Committee's terms of reference were limited, but I personally do not believe that at this stage it would be wise to proceed with a new inquiry, at least until the proposed legislation has been before Parliament and is on the Statute Book.

The noble Lord, Lord Erroll of Hale, made one of his gracious speeches. I do not really disagree with anything he said. I think that may be a good omen for the time when we have a number of Board of Trade Bills, on which no doubt he will be leading for the Opposition. I hope that the same spirit of sense and responsibility will continue and that we shall be able to get those Bills through rapidly. In closing, may I thank the noble Viscount for asking this Question?