EEC: FIFTH DIRECTIVE ON COMPANY LAW

HL Deb 17 March 1977 vol 381 cc159-202

4.5 p.m.

Lord MATS rose to move, That this House takes note of the Fifty-fourth Report of last Session of the European Communities Committee on the Draft Fifth Directive on Company Law: Two-Tier Boards and Worker Participation (R/2128/72). The noble Lord said: My Lords, in the preparation of our report we were greatly assisted by oral evidence given by the right honourable Peter Shore, then Secretary of State for Trade, officials of the Department of Trade, Sir Henry Fisher and officials of the City Company Law Committee, Lord Briginshaw and officials of the Trades Union Council. In addition we had written evidence from a number of sources, in particular the Law Society, the Association of British Chambers of Commerce, the Engineering Employers' Federation, and Aims of Industry.

The publication of the Bullock Committee Report on 26th January 1977 implies that the report of the European Communities Committee on the same subject is now in need of up-dating, and I would draw your Lordships' attention to one or two of the main issues raised by a comparison of the findings of the European Communities Committee and those of the Bullock Committee. The two-tier structure is followed by most of the Community countries. The single-tier structure proposed in the Bullock Report has a parallel only in Sweden, which is not a member of the Community. The implementation of the Bullock proposals would take a long time to achieve and involve a good deal of effort and cost for companies. If a further change to a two-tier system should later be required in order to comply with the Council of Ministers' decision to adopt the two-tier board system for harmonisation's sake, this could lead to considerable confusion and disruption to industry in general.

I should draw your Lordships' attention to the fact that the ownership of industry and the relation between ownership and control are almost entirely ignored in the Commission proposals and in the Bullock Report. The Bullock Committee were of course precluded from considering these matters because of their terms of reference. Proposals for promoting industrial democracy by changes in ownership as an alternative to, or together with, changes in control form a very important matter. Your Lordships may feel that your Committee should not at this stage comment upon it, but in my view, however, it is impossible to arrive at adequate conclusions on changes in control, such as those contained in the Fifth Directive, the Green Paper, and the Bullock Report without at the same time giving very serious consideration to the question of ownership.

This report before your Lordships today, I would beg to suggest, is not a second Bullock—and that may cause some relief to some of your Lordships. Nevertheless, ours was not a Committee charged with the task of producing recommendations for worker representation on boards from first principles. We were required to consider and to report to this House upon the proposals contained in the Communities' Fifth Directive which, so far as worker participation and two-tier boards are concerned, have had the advantage of being in operation in Europe for some time, and therefore we had information as to the difficulties which had arisen and the advantages which had been obtained therefrom.

I do not propose to take your Lordships through the report in detail, but I would draw your Lordships' attention to what I believe to be some of the more important aspects of the proposals. The draft Directive requires that all companies employing more than 500 people shall have employee participation on a supervisory board, and that the company shall adopt the two-tier structure of a supervisory board and a management board. This requirement has to some extent been modified and made more flexible in the Green Paper. At the risk of telling your Lordships what your Lordships undoubtedly already know, the membership of the supervisory board is composed of one-third elected by shareholders, one-third by the employees and one-third independent, co-opted by the other two-thirds. The recommendation does not envisage the selection of employee members to serve on the board being in the hands of an outside body unconnected with the company itself.

Also, it is likely that the Fifth Directive, if adopted, would involve considerable amendments to the existing United Kingdom law in so far as it affects companies and employment generally. Nevertheless, your Lordships' Committee appreciates that it is the Commission's policy and their aim to achieve greater worker participation within industry. They have therefore considered the principal implications and problems which could result from compulsorily including employee representation on the boards of companies. The report examines the existing powers and duties of directors, to whom they have a responsibility and to what extent these powers, duties and responsibilities can or should be imposed upon employee representatives. Under the present law, the duties of a director can, I think, be said to fall principally into two categories. Their duty is, first, to shareholders. I would not necessarily say it is first to shareholders, but they have a duty to shareholders. They also have a duty to other parties, among whom are the staff and the workforce, the creditors, the investors, the suppliers and customers.

As we see it, the Trades Union Congress envisages that the employee members of the supervisory board or single management board would be elected through trade union machinery, and here your Lordships' Committee foresees difficulties. The first is that they would probably have, or feel they had, an obligation to report downwards to the shopfloor, or to representatives of the shopfloor and/or to the trade unions. That could mean that they were in possession of information which was not available to the shareholders or to the investing public generally. Your Lordships' Committee took some comfort from the evidence given by my noble friend Lord Briginshaw, although his opinion was a personal one and was, therefore, unofficial. He said: We are asking for representation; we want the right to have it, and it seems that in that sense and in that area the worker director must take the same responsibility". This was a most helpful comment, a most statesmanlike comment, and it is to be hoped that it will be generally accepted elsewhere. Your Lordships' Committee draws attention to the difficulties which could arise should a board be composed half of employee representatives and half of those elected by the shareholders, with no casting vote. In these circumstances, we can see that a situation of complete stalemate could result, and this could have far-reaching consequences to the companies concerned.

In conclusion, my Lords, may I make reference to what, in the view of your Lordships' Committee, was a most important point, and probably the most controversial; namely, that there should be freedom to enable appointments of employee representatives to be made from within the company or group, so that they would be familiar with, and have knowledge of, the company's business, rather than that they should be elected from an outside source. Secondly, that there must be a transitional period, and that employee representation should not in any circumstances be made immediately compulsory. Much more time is required for Member States to decide, between the dual or unitary board, which structure they think is best suited for their own particular circumstances. To emphasise this point, one has only to cast one's mind back to what happened with the CBI and the TUC. They both started out by taking up one view, and they both ended by changing roles and deciding quite the opposite.

My Lords, I appreciate that this report does not necessarily march in step with Bullock, but perhaps it may offer the basis of a compromise which might be more acceptable to all sides of industry. May I end by thanking all those who submitted evidence to your Lordships' Committee, and also the Parliamentary secretariat and our advisers, who worked extremely long hours. My Lords, I beg to move.

Moved, That this House takes note of the Fifty-fourth Report of last Session of the European Communities Committee on the Draft Fifth Directive on Company Law: Two-Tier Boards and Worker Participation (R/2128/72).—(Lord Mais.)

4.17 p.m.

Baroness ELLES

My Lords, we are certainly grateful to the noble Lord, Lord Mais, for his expert introduction of the EEC Select Committee's Fifty-fourth Report—a report which I think we will all agree deals with a subject of vital concern to the economic and social progress, not only of our own country but of other Member States of the European Community. Here, I should like to express my gratitude to the members of the Sub-Committee, and to the Select Committee as a whole, for having produced a most valuable report. Emphasis has been laid in the report, not so much on the economic and social consequences, as were expressed in the Gundelach Green Paper, but rather on the changes in company law which would be necessary in regard to powers and duties of directors, responsibility of employee directors, participation in supervisory or unitary boards of companies, and so on.

Perhaps I should say straight away that I shall refer only to "employee directors", because I do not consider that the term "worker director" really reflects what we are talking about. I believe everybody in a company, at whatever level they may be, will certainly be workers, whether they are on the board of management or on the shopfloor; and I think "employee director" is really a more correct term in this regard. However, in view of the more legalistic approach of the report, a very impressive list of witnesses gave evidence to the Committee, both orally and in written submissions; and I was rather surprised not to see the CBI listed as among those who gave or submitted evidence. I wondered whether it was just that I had failed to see what was there, or whether there was some particular reason why the CBI felt that they were not wanting to give evidence to the Committee. Indeed, were they invited? Perhaps the noble Lord would tell me when he comes to wind-up the debate.

It is also fair to recall, of course, that the draft Fifth Directive was drawn up in 1972, which was before the United Kingdom and two other Member States acceded in 1973; so obviously the draft Directive was based very much more on the company structures of the then existing Community countries. Also, of course, it is fair to point out that the report before us today, as the noble Lord has already pointed out, was written and produced before the Bullock Report; so we have to see the evolution of ideas on this matter in chronological order. Of course, the terms of reference of the Bullock Committee were very different from those of Gundelach, because the terms of reference of the Bullock Committee were very narrow and were confined to deciding how participation of trade union members on company boards could in fact come about, rather than considering the situation of employees as a whole and the wider matters which appear in the Gundelach Report. The Gundelach Report was based on the representation of all employees, including minority elements. From these employees would appear representatives on the company boards. The second difference—and I think that it is a very major one—between the reports is that the Gundelach Green Paper sets out clearly and well the reasons why it is considered desirable to have employees represented on the boards of companies and leaves wide open the methods as to how such participation is to be achieved.

Also, it makes very clear that the main objectives of employee participation are to increase economic stability and improvement in the working and living conditions of the citizens of Europe, based on consensus between the forces of labour, management and capital, and not to create confrontation between the different elements which go to make up industrial strength. Gundelach also recognises the need for considerable flexibility and the taking into account of the different historical and traditional methods of labour structures. Nevertheless, the report recognises—and, here again, I feel that this is a vital point which Gundelach makes—the need for a new approach to the problems with which industries are faced in the light of economic and technological changes.

I should like to refer to three points that arise in the report before us and which were considered in both the Gundelach and the Bullock Reports. The first point is the question of directors' responsibilities. In paragraph 12 of the 54th Report, it is stated that the responsibility is recognised by the claim tlat employee board members so appointed should have different responsibilities from those of other members.

From the evidence in the report, it would appear that the trade unions—and I believe that it was Mr. Fisher's contribution—consider that an employee director would have different responsibilities from those of other directors and be responsible mainly to those who elected him. I consider that the better view is that all directors have equal responsibilities to look after the interests of the company as a whole, of which, of course, labour is one of the essential elements. One of the reasons why employee directors have succeeded in Western Germany is possibly because both the unions and the employees as a whole recognise that their interest lies in a successful and productive company rather than one that is a failure.

The second point that I should like to make is that it is not possible to attempt to extrapolate a form of company structure from one country to another without considering the criteria and conditions which are in force. Much has been said about the West German system, but very little about the many reasons why it has succeeded whereas, in other countries, it may not. It has partly become possible because the economic conditions in Germany have been very different from ours. Indeed, this must be an interdependent reasoning: it is partly because if the company works the economic progress is available, and the economic progress is available because the company works. These must be interdependent factors.

But there are certain conditions which are imposed in Germany which contribute to the success of the system. One is that the unions are obliged by law to be independent from any political organisation. There are very few unions in Germany—I believe only about 16 altogether, compared with about 490 in this country. Strikes, except in very clearly defined circumstances, are illegal; and labour agreements are, of course, legally enforceable. I believe that one cannot consider the whole system of employee participation and its success in other countries unless those conditions are also considered.

So the success of employee participation must be seen against that background, particularly in regard to the non-political questions. I must confess that it strikes me as incongruous that the unions are seeking—at least on the evidence of the Bullock Report—to sit on the boards of companies in the private sector of the economy while the leaders of the TUC apparently declare their allegiance to the Labour Party which, I believe, includes the nationalisation of all means of production in its objectives. It would surely be unreasonable, therefore, in the present context to expect any trade union leader to work for the success of a system that he believes should be destroyed. Or should trade unionists who follow this policy not sit on such boards if that is indeed their belief? Of course, my own view on this, having seen many opinion polls on this point, is that vast numbers of trade unionists do not want the total nationalisation of all means of production, so that those trade union leaders who declare their belief in this doctrine and support the nationalisation programme of the Labour Party do not in fact reflect the majority of the trade unions. However, I am of course putting forward a personal view and anybody is entitled to get up and deny what I am saying.

Thirdly, the question of the relationship between shareholders and the company has perhaps not had the attention that it deserves. My noble friend Lord Carr of Hadley in his notable speech on 23rd February when we were discussing Bullock, pointed out clearly the change in the role of the shareholder and who the shareholder is. So often he is seen in the popular mind as a capitalist who puts all his ill-gotten gains into companies in order to exploit workers, whereas, if one looks at the lists of the names of shareholders and those whom they represent, one finds nowadays largely institutions such as the pension and investment funds which represent thousands if not millions of individual investors from all parts of the country and from all levels of society. Indeed, they may possibly include the unions themselves which will have shareholdings in the major industrial companies of this country.

The West German system requires the role of the shareholders, which is clearly defined in national legislation, to have control of the board, and that is a point that the noble Lord raised. As a result, the question posed in paragraph 15 of the report would not arise in Western Germany because, clearly, one of the main reasons behind this must be that the investment required to improve and create new employment would not be forthcoming or would be very much less likely to be forthcoming if it were thought that the shareholders who, after all, represent investment did not in the end have the final say in major matters of developing or closing down a company.

So the views expressed in the Gundelach Report for eventual employee participation I myself believe—and I am not here speaking for my Party because there are many views on this in all Parties—are very convincing. I believe that schemes should certainly be encouraged on a pilot basis to try out different forms of participation. However, whatever form is tried, I am convinced that the representation must be from among employees themselves within the company structure, for they have the closest interest in the decisions that are to be taken. Secondly, the employees, at whatever level, must be able to take part both in elections and in being elected. This would also give an opportunity to minority interests to be fairly represented. Noble Lords may not he surprised to know that I am thinking particularly of women in factories in this connection, who, under the Bullock proposals, would have very poor representation on supervisory boards and who would not have their interests properly looked after.

I also believe that the recent situation in Leyland has shown that union participation at the top level is not enough. It may have contributed help in getting things straight—I was of course not concerned in the deliberations so I cannot tell—but it has clearly not been enough. There must be participation and communication at all levels of a company's structure. The employee directors must be free to work for the interest of their own fellow employees for the good of the company. It was clear that the erosion of differentials would be a major reason for discontent and therefore this discontent would become exploitable. Clearer communication through all levels of a company (many companies are making efforts to improve their annual reports so that they are clear and understood at all levels of company structure) and educational programmes for employees to understand why and how certain decisions are taken affecting their working and living conditions also need to be undertaken. I think this is an area where management and directors could put their minds to having a massive education programme for the people on their own shop floor in industry and I believe that in industrial relations this is an area which has been neglected.

They need also the opportunity to participate in much wider share-ownership schemes and in profit sharing schemes so that they have a financial stake in the success of the company, always realising that there must be some form of protection if the company does not do so well for reasons beyond the company's control. We are aware that a great many companies already practise these schemes successfully. I believe also that the vast majority of employees want to work in a successful enterprise but they must be given the opportunity of having more to say in the decision-making processes which affect them.

My Lords, in conclusion, I should like to thank the noble Lord, Lord Mais, for giving us the opportunity to discuss the Fifty-fourth Report and an opportunity to consider industrial relations and the development of company structure in European terms; because ultimately the success and economic and social progress of the European Community must depend on the progress made in those elements of our society which create industrial wealth and, as Mr. Gundelach pointed out, that is the limited liability company.

4.32 p.m.

Baroness SEEAR

My Lords, the Liberal Party's commitment to the supervisory board goes back a long way—as far as the end of the 1920s when the well-known yellow book was published which advocated some form of supervisory board. That being so, it will not surprise your Lordships that we on these Benches take a particular interest in the proposals which have come forward from the EEC. After the recent debate on Bullock, I shall be brief this afternoon pointing out, primarily, the ways in which, from the point of view of my Party, support is given to the proposals in the draft Directive and certain modifications of that support. Our support for supervisory boards is based on a number of reasons: first, because we have always believed that people who work in an organisation have an interest in that organisation parallel with and no less important than the interest of the shareholders; and that that interest should be represented on the supervisory board in the direction of the company. We have also always supported the idea of the supervisory board as opposed to the unified board because it leaves the function of management to be carried out by the professional manager.

We believe that that becomes increasingly and not less important as the complexities of running a business grow. This, in our view, has been one of the reasons for the success of the German scheme, in that increasingly well-trained and competent managers as the executive board are free to get on with the task which is theirs of seeing that the business runs effectively; but that they are answerable ultimately to the supervisory board and the really important decisions, the appointment of the executive board and the big decisions on financial changes, closure of plants, extension of plants, have to be sanctioned by that supervisory board.

But in the development of the thought of the Liberal Party about supervisory boards, and because we have been thinking about them for so long, it is no surprise that we have developed rather a wider range of ideas in this connection than have some other Parties. We have come to believe that the best way of finding the supervisory board is not, in fact, by the appointment of worker directors to represent particular interests, with all the danger that that involves of carrying negotiations on to the supervisory board. We should prefer to see the development whereby an assembly representing equally shareholders and employees jointly elect the board; but that would then be a board chosen by the two groups but on which no one individual would be identified as being the representative of a particular interest. This being so, in our view you would get a more integrated functioning of the supervisory board than if you have a worker director there, somewhat uncertain as to what his role really should be.

In this suggestion, we differ from the German practice; but I am interested to see that we do not differ from the wording of the draft Directive that has come through from the EEC where they refer to the need that members of supervisory boards are acceptable to the employees. The Liberal device in this regard would enable the certainty that the board was acceptable to the employees, which is one of the aims put forward in the draft Directive. In addition to supporting the idea of supervisory boards with our particular proposals—which, of course, do not figure in the draft Directive—as to how that board should be chosen, we believe also that in some respects we should go further than is proposed here.

As the noble Baroness, Lady Elles, suggested, supervisory boards by themselves do not get very far in the direction in which we need to go in the much greater involvement of people in the running of the concern and the much greater understanding of the problems involved in the running of a concern. This is one of the major reasons for having a supervisory board. We believe that a supervisory board must be reinforced and strengthened and must rest upon a well organised works council so that the knowledge that is gained at the supervisory level penetrates into the works as a whole, and so that ideas through the works council come up to both the executive and the supervisory board. We said at the time of the Bullock proposals that the idea that you make good progress by having a supervisory board without first developing an effective works council is a myth.

We have always argued, too, that, along with the idea of extending control and responsibility at board management to people chosen by the workers, there should go a much greater development of employees' share ownership. In the United States, the ownership of shares among employees has gone very much further and has spread more widely than in this country; and this is also true of Europe. Employee share ownership and profit sharing schemes, none of them panaceas by themselves, taken together build up a structure of a reformed kind of industry with a reformed approach by all sectors towards what industry needs to do and the changes which it needs to make. These, taken together, would give the kind of approach that is very much overdue.

Speaking for myself—and this is not a part of Party policy—I am glad to see that the suggestion is that there should be on the supervisory boards room for third parties. I am not convinced that the best way of getting those third parties is by agreement between the employee members and the shareholder members; because in many areas, but not all, it is important that there should be the opportunity for some kind of consumer and/or community representation on the boards, particularly, or perhaps mainly, where you are in a monopoly or a near-monopoly industry, and where the consumer has very little chance to see that his ideas and interests are adequately protected.

I echo what the noble Baroness, Lady Elles, said when she referred to the need for experimentation. The original draft Directive coming from Europe, although one had sympathy with many of the ideas that were being expressed, was altogether too rigid as it was put forward to be satisfactorily adopted in this country. I do not believe that any of us are in a sufficient state of knowledge and experience to settle for any one pattern. I believe that what we need is a minimum standard which all organisations will be required to achieve, but that a great deal of experimentation is needed. I hope that at the end of the day it will not be considered necessary that all companies should have two-tier systems or all companies should have single-tier systems. Is it not possible to have the chance of choosing according to the particular nature of the organisation?

I repeat that we need to experiment, and we need to remember that the right kind of organisation is that which fits the particular undertaking. This is true of an organisation's structure in all its facets. It must also therefore be true of the kind of board structure we need to have. There must be the determination to go ahead, and it must be a real determination. Forgive me, my Lords, if I say that many supporters of employee participation are rather recent converts. However, given that there is now the determination to go forward, whatever the reasons for the new-found faith, surely we must have time to experiment. If we are wise, we shall at the end of the day come out with a variety of different patterns.

4.42 p.m.

Lord RHODES

My Lords, I suppose that nothing sharpens the wits more than waiting to make a speech. The ideas which have crowded into my mind since this topic was first raised on the Floor of this House on 23rd February are astonishing to me. A few minutes ago I remembered that it was 70 years ago when I first began working in a factory. It is exactly 66 years ago that I was sacked for joining a union. And what a lot of things have happened since then! It seems to have taken us a long time to get round to discussing this type of participation. But now it is here, we do not want to do it in a hurry; it wants some deliberation and thinking out before we make our decisions.

We are obliged to the noble Lord, Lord Mais, for this debate today. We are also obliged to the Committee who discussed the matter because it is a very good report. The Fifth Directive, which drew particular attention to two-tier boards, has in a way been overtaken by the Bullock Report. What the Government may or may not do about the Bullock Report applies as well to the Fifth Directive, as it does to the Green Paper which followed it. We may ask: "What is the position now?" What we know is that the Fifth Directive received short shrift from most of the countries in Europe, particularly from France, Belgium and Italy, just as this silly idea about Euro-beer and Euro-bread has had the "raspberry" during the past few days.

The Green Paper highlighted the objections in Europe to worker-participation based on a rigid formula. However, the Green Paper in its conclusions stuck to the original opinion that a two-tier system was best, but with this difference: any system adopted should have a maximum degree of elbow-room, manoeuvrability, flexibility or whatever one likes to call it, and not be tied down to a rigid formula. We must not delude ourselves in believing that a universal system can be invented to suit all circumstances. Neither is it inevitable that Britain should adopt a ready-made design from Europe. We must face up to the fact that we must find our own solution.

The subject has been discussed for years by many committees: the TUC, the Bullock Committee, the Plowden Committee studying the electrical supply industry in England and Wales—on which the noble Baroness, Lady Seear, sat, and which was a very good committee—the Green Paper, which followed the Fifth Directive, and then the Select Committee for Europe. It is as clear as crystal that we have a highly complex and tremendously difficult job on hand. It will take all the resource, patience and clear-headedness of which we are capable to evolve a system that will work and inspire rather than damp down.

I have argued already that management must be free to manage; it must not be deflected by the introduction of collective bargaining by a representative body on any company board, because if that happens it will be a disaster. Fortunately, we have some hope that the right honourable Edmund Dell, our Minister at the Department of Trade, understands that. In a recent speech to the Society of Long-Range Planners, he said: In Germany they insisted on the need for a management board … capable of taking rapid decisions in the interest of a company. He went on: The Germans regard management capability as a paramount consideration and I think it will be agreed, that we here—on any proposals that we make—must do the same.". In all probability, when the time comes, we shall remind Mr. Dell that he said that.

When our EEC Committee considered the two-tier system, they soon realised that here was a concept that was many-sided and had many variations. May I offer a suggestion at this point: that we stop talking about a supervisory board. We should really get down to considering carefully what the function of a second-tier board should be. If a two-tier board is intended to be a second or higher management board, the dangers are obvious to everybody. If, on the other hand, we look to the second tier as an auditing body to which the management hoard is accountable for its actions, that would be a different kettle of fish altogether. In the face of these alternatives, would it not be a good move to establish a few basic principles? I do not claim that any I refer to are original. In fact, Strategy of Industry, published after the Chequers meeting in November 1975, was larded with them. However, they are worth repeating.

The basic objective is to get effective employee participation. That is No. 1. But let us get away from the idea that it can be achieved only by representation on the board according to a rigid formula. In most cases, if that were to happen it would be ossification and not participation. I would go on to say that any effective participation starts at the grass roots and must grow up from them. In the case of a company, it should be at all levels. There is no reason why there should not be a link at board level with board members and an involvement in business policy. Again, we have to accept the fact that there is an enormous difference between management decision-making and management accountability. The sooner we get to an understanding of that, the better.

What do we do now? We must keep on with discussions and deliberations before ever we issue a White Paper. Do not let us commit ourselves too soon. There are people who have suggested a Royal Commission: personally, I do not know about that. In time it may be necessary to legislate to get companies on the move towards involvement, but whatever legislation we introduce, we must leave some elbow room for manoeuvrability.

We must encourage companies to develop their own involvement, within the framework of company law. We must at the same time be careful, where firms have really first-class and well-proved systems, that these are not upset. We have done too much upsetting of good institutions. When I was Lord Lieutenant of Lancashire, I went round to see what they were doing in the way of plucking out the middles of cities. I kept telling them: "Never pull anything down until you know what you are going to put up in its place." We have a long way to go on this. I would say again that we must be careful to see, where firms have really first-class and well proved systems, that they are not upset.

My next point is this. Let those who are thinking this matter through consider what is the right and proper form in which a board can be accountable. I am using the word "accountable" instead of the word "supervisory". Bullock, in his biased terms of reference, was never asked that question—never once—and we must not confuse the matter of decision-making with business policy formation. That must be clearly understood.

Our Prime Minister has made a rare job of his visit to America and on his return he said these words: I think it is a worrying fact that the real position of this country is so distorted abroad. We have got into a trend where everything that is wrong is headlined and everything that is good is put at the bottom of the page. In the old days we could afford the self-denigration factor. We cannot afford it any longer. We are now fighting for our lives and it is beholden to all of us to put abroad a fair representation of our country's position. That was well said.

I should like, in finality, to say this. We have a nucleus of companies in Britain which are second to none in the world. I travelled round the world during a period from March to May last year, and every single place I went to I found that there was admiration for some of our big companies—companies which have shown accountability not only to their workers and their shareholders, but also to the nation. They have the national interest at the forefront of their thinking. Let us give them the credit for that. Such firms can teach the EEC something, and such firms are the envy of the Western World; so I would urge that we be careful to see that any legislation we may introduce here in the future keeps them that way. In addition, everybody should try to bring up the level of competence and character of companies that are lagging behind. If we try to do that, we have a big job on hand.

4.57 p.m.

Lord KINGS NORTON

My Lords, I think most of us will find ourselves in complete sympathy with the noble Lord, Lord Rhodes. I always admire his speeches and I found nothing to disagree with in what he has said to us this afternoon.

The Select Committee gave their opinion of this complex matter of two-tier boards and worker participation—or, as I think it is preferable to call it, as did the noble Baroness, Lady Elles, "employee participation"—in paragraph 33 of the report that we are discussing. I find myself largely, though not entirely, in agreement with their view. They discuss in the report the idea of worker participation at the highest board level, and I gather from the wording of paragraph 33, which was reiterated by the noble Lord, Lord Mais, in his introductory speech, that conditionally at least they accepted it. But I think the interests of employees in the United Kingdom may not necessarily be best served by adopting it.

In the debate we had on the Bullock Report, the noble Viscount, Lord Watkinson—and today the noble Lord, Lord Rhodes, was to some extent echoing what he said—seemed to me to make an excellent case for an alternative approach to the problem of doing justice to the views and aspirations of employees. My own experience in industry suggests that this alternative approach—based on what the noble Viscount, Lord Watkinson, called partnership and on consultation and the exchange of ideas and information between management and employees at all levels of an organisation—has great merit. I believe the Select Committee should consider this interpretation of employee participation. As the report indicates, a new version of the Fifth Directive is unlikely for another two or three years, and so it would seem we have time to do some more thinking and possibly to discuss the ideas we develop with our European partners.

In the process of making up our minds as to the course we should best pursue, I think there are aspects of the two-tier system about which we should be quite clear; and I do not think they are explicitly dealt with in the report. The first is this—and it is one to which the noble Baroness, Lady Elles, has referred today; we hear a great deal about the German two-tier system. That is undoubtedly because of German economic success. But I do not think that German economic success has much to do with their two-tier board system. I believe that German success is a function of Teutonic industry, of having no more than 16 unions, of a taxation system which provides incentive and, above all, as the noble Baroness, Lady Seear, has said, a highly sophisticated system of worker councils—the result of about a century of development—which are in frequent consultation with management, and which in some areas share decision-making with them. This is what the Germans call co-determination.

The German two-tier system itself is, in my view, rather unbalanced. The Aussischtrat—the supervisory board, as we translate it—with its almost 50 per cent. worker participation, has the job of appointing the members of the Vorstand, on recommendations from the Vorstand, of top financial policy, of approving mergers and of little else. It usually meets once a quarter. The board which really matters, and which controls the company and its workers and negotiates with the union—there is unlikely to be more than one union in a given company—is the Vorstand, which has no worker representatives at all. Its members are all full-time senior executives.

My feeling is that any pressure, if there ever is any, to emulate the German two-tier board system should be resisted. I believe that we should instead continue to develop, augment and improve our own two-tier system. At the risk of repeating myself, I want to emphasise, as I did in the debate on the Bullock Report, that we have a two-tier system here. Call it a unitary board system, if you like—though I think it is a misleading term—but the fact is that in all but the very smallest companies there is, in a United Kingdom company, under the board, a management committee under the chairmanship of the managing director. When we are told, "You ought to have a two-tier structure," the answer is, "We have one", and do let us remember that.

But let us look carefully, also, at the possibility of supporting it by voluntary schemes, such as the noble Viscount, Lord Watkinson, outlined, and such as many companies already have, or possibly—but not probably—less voluntary schemes like the employee councils of the German industrial structure. In this connection, I strongly recommend to noble Lords the highly informative article by Sir Emmanuel Kaye in The Times yesterday. Sir Emmanuel heads a German company as well as a British one, and if the Select Committee have not had the benefit of his advice I am sure they will find it valuable.

Just as I believe that the German two-tier board system has little to do with German economic success, I believe that our own kind of two-tier system has little to do with our own relatively poor performance. The United States, about whose commercial and industrial achievements there can be little argument, has a system similar to ours. Our system is not perfect. Perhaps it should be rather more standardised in pattern. We see large companies with small boards, we see small companies with large boards, we see companies with no non-executive directors, which is bad, and—which is worse—we occasionally see companies with a host of non-executive directors and only one or two executives.

Perhaps without designing straitjackets, which is what the Bullock Report appeared to favour, we should try to develop a more consistent pattern at the same time as we develop the concept of employee participation, conscious of the appalling difficulties, indicated in the report, which we shall be in if we do it the wrong way. I hope, too, that our pattern, when it crystallises, will not require the creation of an arbitrary boundary, like the 500 employees of the draft Directive or the 2,000 of the Bullock Report, below which the system need not apply. If we are too rigid about boundaries, we are in for quite a lot of trouble.

I begin to detect signs of a more reasonable definition of harmonisation in the EEC. There is evidence for that view in the report and in the Green Paper. At one stage, it seemed to mean, in the Commission's dictionary, the development of a single system for the Community. Perhaps it soon will mean in "Brusselese" what I think it ought always to have meant—the elimination of discord. This will be achieved by each country developing its own system with the knowledge of how its partners are developing theirs. It is far, far better for us each to understand the other's systems, than that we should struggle—almost certainly unsuccessfully—to have the same.

It is, in any case, evident that we do not need a single company law structure for Europe to achieve co-operation. There are enough examples of multinational companies and industrial collaboration in Europe to make clear that variations in company law are not obstacles in the face of potential commercial, technical or financial advantage. To take a recent example, the collaboration of British, German and Italian aircraft organisations which has produced the MRCA, or Tornado, aircraft, was controlled by an international company called Panavia. Its board was international, its behaviour was international, but it was Panavia GmbH, subject to German company law; and that produced no difficulties at all.

To struggle towards identity of structure —and it no longer, I admit, seems likely—is unnecessary and time-consuming. Let us improve our industrial system, understand our neighbours' systems and eliminate any elements which hinder collaboration.

5.7 p.m.

Lord DOUGLASS of CLEVELAND

My Lords, I have listened with great interest to what has been said and I think that the meaning of the recommendations has been well outlined by my noble friend Lord Mais and subsequent speakers. All have addressed themselves to the problem rather than to personalities, except perhaps the noble Baroness, Lady Elles, who introduced a rather personal feeling into this debate which I regret. because it is one of those subjects which will require cooperation from everybody in the country if the problem is to be solved. She is under a misapprehension when she says that they do not have trouble in Germany because strikes are prohibited by law. They are prohibited by law, but in 1968 the profits of the companies went up astronomically while wages remained almost stationary, and there were wildcat strikes all over Germany.

Baroness ELLES

My Lords, will the noble Lord allow me to intervene? I think he will see when he reads his Hansard tomorrow that I did not say that supervisory boards worked because strikes were illegal. I merely said that if you consider one form of democratic institution, you have to take it in the context of what obtains in other legislation and criteria. I certainly did not say what the noble Lord implied I said.

Lord DOUGLASS of CLEVELAND

My Lords, I feel that what the noble Baroness has just said implies exactly the same thing, that she feels that if you have legislation against strikes then you do not have them. But I will read Hansard tomorrow. What I know is that if a large body of employees is totally dissatisfied with the conditions under which they work they will strike, and our job is to find a method of achieving the conditions so that they will not strike, so that they will accept the sacrifices which are necessary, as workers in this country have accepted sacrifices since the Social Contract came into operation. It is necessary to have understandings. The noble Baroness also said that the share ownership schemes were successful. They were not. They had premiums of 30 and 40 per cent. on them and they have been absolutely unsuccessful. Hardly anybody has taken them up. Those things do not help in any discussion of this character.

A good deal has been said about reporting hack. I was on the Iron and Steel Board which controlled the iron and steel industry, in so far as one could not develop any part of that industry without the permission of the board, nor put up the prices charged for iron and steel at that time. On that board, we were able very successfully to control an industry without having to come down hard on it. I notice that the noble Baroness, Lady Seear, is no longer here but she asked for consumers to be represented on boards. Consumers sat on the Iron and Steel Board. Therefore, when prices were fixed the consumers knew exactly what they would have to pay. Every one of us on the board reported back to the people whom we represented. I see nothing wrong with reporting back, if a modicum of discretion is used and if those things which would be hurtful to the company concerned are not reported back. Every trade unionist understands that.

Corning to the problem of unemployment which trade unionists have to face at present, everybody says that we must increase investment and that if we increase investment we shall cure unemployment. In Germany, which has been so successful, the General Secretary of the German TUC has said that under the present system there is no cure for unemployment: every time you invest large sums of money in industry you increase unemployment because of the large sums of money which are spent on technological improvements. We have an example of that in Great Britain. The Post Office are now installing new electronic systems rather than electric machinery. It has been estimated that a cubic inch of electronics will provide this year as much output as electric machinery and that in 10 years' time the output will he 1,000 times more than that which will be provided this year. That is, as each year goes by and a new electronic unit is installed there will be an extra 100 times output from that unit. When the workers of the world—the problem affects the whole of the world—see this they say, "What is going to be done about it?"

We have voluntary systems of participation and co-operation which have worked well for 10 years, yet in those years unemployment has increased. Unemployment is increasing dramatically and nobody seems to be able to stop it increasing. They had guest workers in Germany, all of whom have now gone home, but their own workers will face unemployment now as a consequence of technological improvements. This is the problem to which we have to address our minds. We argue that we can solve the problem by introducing a shorter working week, but as soon as we put forward that argument we are told that we cannot afford a shorter working week; there is not enough money in the country to pay for it.

I am not going to try to provide an answer to the problem. Instead I am going to suggest that unless there is greater union participation the unions will not believe that the employers are trying to solve the problem correctly. The employers will try to persuade the unions otherwise, but they will not get very far with it. In these circumstances, is it difficult to understand why the workers say, "We want not only consultation but the right to take part in decision-making"? The Bullock Committee jumped the gun. The noble Lord, Lord Rhodes, said that we are in a situation where industry is controlled by a managerial society: that it is controlled not by the shareholders who put in the money or by the workers who work in the industry but by the managers who manage the industry. If we are to have a managerial society and industry governed by managers, it is self-evident that the election of trade unionists on to boards will not take place. The Bullock Committee killed this argument from the word "go" by suggesting that there should be unitary boards.

This brings me to the question of the supervisory board in Germany. Everybody says that we ought to adopt the German system. However, it is not a German but a British system which was established when Ernest Bevin was Foreign Secretary. He sent Lord Feather, who sat in this House, to Germany to help them to solve some of the problems with which they were faced after the war. He created industrial trade unionism instead of a great number of trade unions and, having created trade unionism, he created works councils. There is a great deal to be said for works councils.

There was a showdown in British Leyland last week because a number of the men broke the rules. It was not a quarrel between the toolmakers, who are skilled men, and unskilled men, as is so often represented in the media. It was a quarrel between skilled men. If the unions had given way on that question and awarded the lower-paid toolmakers the same wages as the higher-paid toolmakers, you can take it from me that there would have been an almighty row in the industry. So it was a trade union quarrel, which the works council could have looked at and probably solved. The problem at British Leyland is that it is an amalgamation of a number of companies, all of which have carried their rules into the one company. This problem must be thought out, and a works council could do that.

The system established in Germany by Ernest Bevin consisted of an industrial council, which made industrial decisions, and equal numbers from each side of industry were represented on it; regional councils which made regional decisions, again with the same numbers from each side; and works councils, right down to the workshops, which made works decisions. A national decision overrode all other decisions, while regional decisions overrode all works decisions. Therefore a decision-making system was established which could not trip itself up. It represents communications par excellence, and at the end of the day it preserves unity in that society—except, as I have said, when there is an unfair situation in which profits are soaring and wages are virtually standing still. Then there are strikes. However, the machinery is there to deal with strikes.

In this country, where we have the problem of British Leyland, we have the advantage of trade unions which are prepared to carry responsibility. I hesitate to think what would have happened if the quarrel had been between two unions. I do not think that it would have been settled so easily as it has been settled now. However, what the unions have to do is to apply the rules; in trade unionism, rules will apply when legislation is completely hopeless. The AEU stuck tight to its rules and did not ignore the problem. You must talk to the men and you can even stretch the rules, but you cannot break them. It is fatal to break rules; you must have rules somewhere. I believe that we in this country can widen the scope beyond one trade union to all trade unions. At British Leyland all the unions stood behind the AEU and said, "The rules of the union must be sacrosanct".

If we had co-determination in this country and a works council, although not necessarily a works council, and the good will of the people inside the trade unions, I believe that half of our internal trade union problems would vanish. I believe we could then get communication with the people on the board, and far better if it is a supervisory board where one can at least make an approach to this problem with trade unionists working alongside managers. I believe we could then get an understanding of the problems, and we should be at the stage of asking the right questions. I am not going to attempt to say what the solutions would be, but I do want the right questions to be asked, the right machine to be set up and, with the noble Lord, Lord Rhodes, while I have been sitting here all sorts of ideas have been going through my mind as a result of this debate.

If we can get to the point I have indicated I think it could be the beginning of a successful understanding in this country towards tackling the one great problem of the present day, the inevitable unemployment which will arise from the present system; with the system itself adapted to a situation where workpeople will not feel that they are going to be unemployed and not wanted, while those who have the money and who own the shares will get all the benefit from these technological improvements. The only way I can see that happening is for there to be a board of some kind on which the workers have as much influence as the employers. It cannot be the managerial board and, in the absence of something better, I think it must be a supervisory board.

Lord BOOTHBY

My Lords, before the noble Lord sits down I should like to ask him one question. He put his finger on the vital spot but he did not give the answer. It is that the steady advance of technology in industry is bound to lead to unemployment. With all his great experience, the noble Lord did not tell us whether there was any solution. I sometimes doubt whether there is one.

Lord DOUGLASS of CLEVELAND

My Lords, perhaps I may stick my neck out. I was unemployed for the whole of the first year of my married life, so I speak feelingly about people who are unemployed. If you walk the streets for a year, particularly when you have just got married and all life is before you, you feel quite bitter. In the shop in which I worked at one time we were to work only one furnace out of three for a foreseeable period of two years. The management told us that, and they said: "We are going to declare some men redundant". There was no redundancy pay in those days. We had a meeting and we said: "We are not going to allow anybody to be redundant; we are going to share the work". Accordingly we shared the work: we worked one week and drew the dole for two weeks, and we knew that we were going to do that for two years. In fact we did it for more than two years.

There is not enough money in the industry to have a shorter working week, so is it possible to evolve a method whereby work is shared with your fellow men when there is only so much work available? I think it is possible. If I am asked to work out a scheme I will do so; I have not done it yet. I think the answer is that if there is only so much work it must be shared; the method of sharing must be devised, and what better than a board on which workers and employers sit together?

5.24 p.m.

Lord MORRIS

My Lords, I welcome this report of the Select Committee in that it highlights with heady erudition and laudable brevity some of the very real problems which arise when considering the possibility of tinkering with the structure of limited companies. There has been much debate on this subject in recent years, arising in my view partly as a result of the belief that those who work for a company are more members of that company than the remote shareholder, who in many cases is more a lender of capital than a participating member. Similarly, it is often held that those who work for a company are part contributors of the capital of that company. I would respectfully submit that that is undoubtedly so, for in so far as those who work for a company contribute to the creation of a surplus they are in fact creating the internally generated capital of the company. Similarly, in so far as those who work for the company create the asset goodwill they are partly contributing to the capital appreciation or worth of that company, yet this employee-company relationship is in no way reflected in company law. The relationship of the employee to his company is reflected in the common law—master and servant—but those who work for a company are not merely servants or officers of the company but are participating partners of capital who have a duty to serve the interests of the company as a whole.

However, I entirely agree with the view taken by the Royal Commission on trade unions and employers associations, in that they felt unable to recommend that the appointment of worker directors should be made compulsory. That must be right, because tinkering about with the structure of a board of directors of a company might well prove divisive rather than cohesive and lead to inefficient, contentious and indecisive management. I submit with respect that those who hold the view that the structure of the board of directors of a company should be changed are playing a cacophonous tune on the wrong organ.

As your Lordships are aware, the two organs of a company are the board of directors, analogous to the Government or executive of the company, and the members in general meeting, analogous to the parliament of the company. It is in the parliament of the company that those who work for a company, other than at director level, might best have their voice. I believe that view was held as long ago as in the 1920s. Section 45 of the 1929 Companies Act, which is the forerunner of Section 54 of the 19.48 Act, provides, inter alia, that a company may lend money to its employees in order that they might purchase its shares. The artifice of creating a two-tier board is, in my submission, wholly unrealistic and above all superfluous, for in practice in any well managed company such a structure already exists in that the managing director—the chief executive of the company—is responsible to, and reports to, his fellow members on the board after consultation with, and consideration reports from, management teams under his control.

To put it another way, non-director level management is the second tier. Any management which does not regularly consult and consider the views of all those who work for the company does so at its economic peril. Similarly, good management, like good Government, will, and does, consider the views of all those affected by its decisions, not only its shareholders, but staff, creditors, prospective investors, clients and customers.

Finally, I feel that it is worth considering the perspective of this problem. At present there are some 670,000 companies registered in England and Wales of which some 400,000 are trading. Of these, only approximately 1 per cent. are listed on recognised stock exchanges, namely, about 4,000. Ninety-nine per cent. of all companies trading are small to medium sized companies, and in my experience those who work for the majority of the companies in this country participate in the management, both directly and indirectly, for where management fails to involve those who work for the company it does so to its great cost. That is a reality of corporate and business life. Greater worker participation should lie in the heart of good management—not so much in the body of the law.

5.30 p.m.

Lord HOUGHTON of SOWERBY

My Lords, I welcome the contribution to our debate that has just been made by the noble Lord, Lord Morris. I think all speeches made in your Lordships' House by younger Members are of especial value. In my view, all speeches made by noble Lords who are under the age of 50 should be printed in bold type in the Official Report because they make more worthwhile reading than all the rest put together. I wish I qualified for heavy type in my new version of Hansard.

My Lords, we are disussing a subject to which we gave many hours of debate very recently, and today our debate is a kind of postscript to the major debate on the Bullock Report, that we had recently. In the matter of timing, and the dates of the documents that we are looking at at the moment, there is a curious oddity about it. All the evidence given to the Select Committee was completed before the Bullock Committee was set up. The Select Committee made its report in the middle of 1976 when the Bullock Committee was halfway through its task. We are debating the report of the Select Committee weeks after the Bullock Committee reported. It all seems to be wrong somehow, and yet I believe that it is perhaps more convenient than we realise that we are discussing the draft Fifth Directive at a time when it is likely as time goes on to become more relevant to the debate now in progress.

I want to start with one or two very short propositions. The first is that we have been very backward in this country in innovation and experiment with company management. Although many radical schemes have been introduced, in general the basic structure of company law, company structure and organisation has remained the same for many years. I believe I said on a previous occasion what a pity it was that the report of the Whitley Committee, recommending joint industrial councils in industry, in 1919, was brushed aside by both sides of industry and it was left to the Civil Service to make a thoroughly good job of it. Had both sides of industry been keener on adopting the recommendations of the Whitley Report those many years ago, we should have had works councils in Britain for exactly the same length of time that they have had them in Germany, because their works councils started at the same time as the Whitley Councils in the British Civil Service.

The second proposition that I want to put to your Lordships is that we are discussing the creation of a new franchise, a new dimension to civil rights. This is most important to bear in mind, because it suggests that you cannot have too many loose phrases on what we mean by "participation" and in what framework and in what form it is to be granted. This is why, with great respect to my noble friend Lord Rhodes, the time for wide generalities is coming to an end; we really have to get down to the practical issues that are waiting to be dealt with. It is a pity that we are having to talk generalities at all. Had we taken note of what was happening in Europe years ago, long before the EEC, we should have been much further advanced in our thinking on this subject. But you cannot say we must have flexibility, we must have manoeuvrability, we must have elbow room, we must have all the room in the world to devise our own schemes, when we are dealing with a new franchise. There is bound to be form, and there is bound to be sooner or later statutory support for a new franchise; and that means that we have to be more precise in our conception of what it is and how it is to be applied.

When we are asked to take note of the report of the Select Committee, I ask how much note do we take of it, and when we have noted it what do we do with it, having given it our temporary attention this afternoon. It is certainly part of the debate that is to go on for a little while longer, as I said a moment ago; but I think we have to put this now a little further forward on the agenda of the debate, because the majority report of the Bullock Committee is having a very rough time. It has not only been criticised, it has been condemned, and there has been talk even of resisting it. I see the noble Lord. Lord Carr, there, and whenever I see the noble Lord I am bound to think of the Industrial Relations Act 1971; I cannot help it. I am bound to use him—with great respect and affection towards him—as a striking illustration of what you cannot do by Act of Parliament. And you can no more do it on management than you can do it on the unions. Let us bear that in mind. There is more than one interest here, even when conferring a new franchise, an extension of civil rights. There are those who are affected by that extension; there are those who have to work with it and come to terms with it, and their views and their attitude have to be borne in mind.

So, my Lords, I think we must employ that strange genius that we always fall back on, the voluntary system. We must try to make progress so far as we can and for as long as we can by voluntary means. What is it to be? My personal view is that the majority report of Bullock is now out, and we, therefore, have to find some alternative to it. The alternative is not to do nothing. I think that the movement towards a wider democracy is so strong now, the anxieties in industry and the feeling of people that they are cogs in a machine are growing so strongly and so speedily, that there will be an increasing drive to have some share in the decisions and in the discussions on matters which are going to affect the lives and livelihoods of so many people. As has been raised in the debate already, the effects of technology, are obviously matters upon which the worker has a greater interest than perhaps anybody else because his job may be at stake. All these must come into the field of discussion.

How then is it to be done? If the majority report of Bullock is out, what is likely to be in? Here I pass to the minority report, and one sees in the minority report at least a standby solution to this dilemma along the lines of the Fifth Directive that we are discussing now. That is the two-tier structure of company boards. Bear in mind also, my Lords, that some strange things have happened on this subject. The initial evidence of the Trades Union Congress to the Bullock Committee was in favour of two-tier boards. The initial evidence of the Labour Party to the Bullock Committee was in favour of two-tier boards. As the noble Lord, Lord Kings-Norton, pointed out, the CBI have now come out in favour of something they were opposed to to start with. They have all done the same; opinions have changed as they have gone along. I hope I am not imputing any motives in members of the majority of the Bullock Committee, but I am hound to say that I identify four members out of seven who held very strong views against going into the EEC at all, and I cannot think that they embraced with enthusiastic affection any of the European institutions and perhaps thought of the essentially British alternative.

Do not let us be so prissy about the British. We are no longer able to show that what is British is best. Others have been trying other methods and have succeeded. In the earlier debate I said—and I repeat it today—that worker participation on these lines is an indispensable condition of the survival of the mixed economy. There is no other way in which to eliminate the ideological struggle on the shop floor. The trade union movement and the management in Europe are able to co-operate so successfully on a scheme of this kind because there is no longer an ideological struggle taking place on the shop floor. Wherever else it may be, it is not on the shop floor. I believe that that has paved the way for a degree of cooperation and efficiency, especially in Germany, that we would envy here. It is an encouragement for us to look at what has succeeded elsewhere.

The proposal for a unitary board on the lines suggested by the Bullock Committee has not been tried elsewhere except in Sweden. There are numerous examples of alternatives to that of the two-tier structure. I believe that this is the scheme which may hold our attention more closely as the days go by because it appears to be the possible alternative to the majority report which would satisfy the main principles of participation. It would be built on practical experience elsewhere and it would be more acceptable to a large section of British industry in a way that the majority report would not. It cannot be so very bad, otherwise the Trades Union Congress and the Labour Party in the first instance would not have put it forward as their preference in the appointment of workers to company boards. Many details would have to be thrashed out—for example, powers, proportions, the basis of election and that kind of thing.

Within the structure of the two-tier system, there is room for modifications and improvements. However, we shall probably find that if we are to get anything approaching an agreed solution so that we can go forward with this new franchise of worker-participation in industry, we shall have to do it on the basis of the two-tier board. In 1974 I paid a longer visit to Europe than that paid by the Bullock Committee, and I looked at these matters. I attended meetings of management boards and supervisory boards; I attended meetings of works councils. I went round industry with, if I may say so, a not inexpert eye, because, after all, I was connected with the Whitley Council system, departmentally and nationally, in the Civil Service and was a member of the General Council of the Trades Union Congress for 10 years. I did not go to Europe as a novice. I thought that I could distinguish between what was good and what was not so good in that system. There was more good there than one sees in many parts of industry in Britain today in the relations between management and workers.

I am confident that we can look at this report with a considerable degree of faith; it is something which we should examine more closely before we get drawn off to improvisations of a special character of an essentially British nature which we believe would be the alternative to the majority report. I believe that we are on the way to finding an acceptable solution. The report before us this afternoon is a very valuable contribution towards it.

5.45 p.m.

Lord PRITCHARD

My Lords, today one constantly hears of the two sides of industry, of worker directors and shareholder directors. That is quite wrong, as it is quite wrong to talk of workers and management. We are all workers; we are all one in the team, or we should be. If we are not, that is where we are at fault. There are not just two sides of industry; there are certainly three. Today the Government play a major part in industry. The Government, the shopfloor and management are not sides but component parts that must fit together and really work for our benefit. I agree with the remarks made by the noble Lord, Lord Houghton of Sowerby, that it is on the shopfloor that we must seek unity and solve the problems.

I hope that it is not presumptuous of me humbly to put forward some thoughts that may lead to a solution to this very serious industrial relations problem which faces us. My only excuse is that I have led companies of over 50,000 employees. Among my groups I have quite a large company in Germany under my chairmanship, together with companies in Holland and Belgium. Therefore, for seven years I have had first-hand experience of two-tier boards and worker representation on those boards. It does work. It certainly works in Europe, but it does not necessarily mean that because it works there it should be imposed here, and certainly not automatically from the top. The circumstances here are very different.

As the noble Lord, Lord Douglass of Cleveland, said, Germany owes a great debt to Mr. Kevin and especially to our old friend, Lord Feather, who produced this very brilliant Act whereby there are 16 trade unions and one trade union to each industry, of which everyone in the company is a member. The noble Lord, Lord Kings Norton, has already fully outlined the functions of the German two-tier board system, the Aufsichtsrat and the Vorstand, so I shall not go into that. I would add one point. Because everyone in a company is a member of the one trade union—and therefore there is no poaching; different views are not expressed; it is just one body—there is no problem over how members from both the shopfloor and the offices are elected to the boards. That disposes of a very major problem that arose between the CBI and the TUC. However, circumstances are very different here. One only has to imagine the number of unions in British Leyland to appreciate that.

In Germany, directors who are elected by the shareholders or by the employees to the supervisory board are absolutely equal. There are no first-class and second-class directors. That disposes of another problem and is what the noble Baroness, Lady Elles, had in mind. In this country there is a fair amount of fear and fright about the concept of two-tier boards. Without going into the pros and cons—because they have been well aired today—most major companies in Britain, although they do not know it, operate two-tier boards. Most large companies have holding companies, which, in effect, are a supervisory board; they are not exactly the same, but they are the British version. The actual management of the company is run either by subsidiary company boards or committees and they become, in turn, the Vorstand. Therefore, the step is not all that great.

As the noble Lord, Lord Rhodes, said, it must be obvious that the whole concept of our problem is getting ideas to flow upwards from the shopfloor as well as downwards from the board. For instance, one example is in production methods. It is quite obvious that they will be much more effective if the suggestions come from the bottom upwards rather than if they are imposed by management from some austere position at the top.

Looking at British industry today, I should like to say something which has been touched on, but only lightly. We have much to be proud of, as well as some things we can well be ashamed of. There are a large number of companies, by far the majority in this country—and particularly the smaller companies and medium sized companies—whose efforts in both the home field and particularly exports need commending in the greatest possible way. They produce excellent goods, delivered on time at the right price, but that never hits the headlines in the media. It is only the distressing and sad parts that they bring up.

To come more seriously to the point of worker representation, I think that we should all accept gladly, as the noble Baroness, Lady Seear, said, that people who invest their livelihood in the business deserve to have the right to be consulted just as much, if not more than, the people who invest their money. They need to be able to make their views known and to be consulted before a decision is made and not merely informed afterwards, however beautifully they may be informed.

My conclusions are really these: more important in priority than two-tier boards is legal insistence on statutory works councils for companies of 100 employees or more—as small as that. They should be democratically elected annually jointly by the shopfloor and by management. They should be intimately involved not so much with some of the top level things that everyone thinks are important and are not so important, but with matters that really concern the members of the company, whether they be in management or on the shopfloor. I am thinking of such things as job evaluation; wages and piecework rates; working times, including overtime; holidays; redundancy; work procedures; closing of factories; any major alterations (one hopes, improvements) that are going to lead to more profitability for the company that could well be shared with the workers. By "workers", I naturally mean every employee and not just those who work in any one part of the company.

We cannot do that necessarily today for reasons we all know, but in the future I believe that there should be a much closer relationship with what a man earns and with what he produces and the economies of that production. I feel that in return for this we should get from all our employees a much greater pride in the company, a much greater dedication to their task—which, I am afraid, exists to a much greater extent in Germany, Japan and the United States.

Finally, may I make a suggestion on the subject of profit sharing. I do this with all humility, and begging to differ from the noble Lord, Lord Douglass. I agree with him that this has failed in many instances, but it has succeeded in the United States. There are other ways of applying this, and I believe that the icing on the cake that we should bake, knowing that the bigger we bake the cake the bigger part we will get out of it, should be profit sharing on the American pattern. There both the company and the recipient receive tax benefits on money allocated from profits and built into a fund which ends up by individuals, at a given time, or when they leave or retire, receiving shares which they could, or could not, convert into cash. This involves them much more realistically in the company. I feel that such legislation would be a valuable contribution to our economy and could pay big dividends.

5.54 p.m.

Lord ORAM

My Lords, I would first wish to pay tribute to my noble friend Lord Mais for giving us this opportunity to have this most useful debate, and also to the Select Committee for their work in producing such a clear and understandable report on this very detailed and important subject. I should like to refer to the points raised in the report itself later in my speech, having first of all outlined Government policy on Industrial Democracy in the European context. The House will remember having debated other EEC Directives concerning company legislation in April last year, and I would therefore also take this opportunity of expressing my pleasure in seeing that the House is being kept fully in the picture with proposals in the EEC which will affect our own legislation in this country.

The Instruments covered in the Fifty-Fourth Report of the Select Committee have direct relevance to the debate in this House on 23rd February—to which a number of references have been made— on the report of the Bullock Committee on Industrial Democracy. Your Lordships will doubtless remember that long debate. I certainly do but I feel it may be helpful to your Lordships if I recall the Government policy made in a Statement by my right honourable friend the Secretary of State for Trade on the publication of that report. He repeated the Government's commitment to a radical extension of industrial democracy through the representation of the work force on company boards and to the essential role of trades unions in this process; and he said that we intended to undertake consultations with the CBI and the TUC on the basis of the majority report, in order that as much common ground as possible may be identified.

He expressed the hope that these consultations would take place in a positive and constructive atmosphere with recognition by both sides of industry of the need to seek a lasting settlement. As I have listened to your Lordships' debate today, I have felt that most, perhaps all, the contributions to which we have listened have made significant contributions in that spirit. This process of consultation with the CBI and the TUC has now begun. The Prime Minister, as your Lordships will be aware, has recently had discussions with the CBI; and a group of Ministers has met with them to explore further their point of view, particularly in relation to problems of participation below boardroom level.

The TUC are currently studying the report in detail, and arrangements are in hand for the Secretaries of State for Trade, Industry and Employment to meet them to hear their views. Letters and statements are being received from organisations and the public, all of which will be helpful to us in reaching conclusions for the framing of our legislative proposals. It is therefore clear that every effort is being made to reach a solution that will be workable in this country and acceptable to Parliament, industry, commerce and the professions. I should like to emphasise this point, since when I later discuss the European harmonisation programme I feel sure it will be helpful to your Lordships to remember that the Government's policy must first be to achieve a solution of our own problems.

Turning now to the Continent, your Lordships will be well aware of the considerable experience of worker participation at board level that has been gained in Western Europe for many years. Apart from Italy, Ireland and ourselves, most other EEC countries have arrangements of one form or another for participation at board level, and I do not think I would be misleading your Lordships if I were to suggest that we in this country have been somewhat tardy in this field. I found myself agreeing with my noble friend Lord Houghton when he was making a similar point.

The European experience, and particularly in Western Germany, has shown that worker participation has made a considerable contribution to industrial harmony and has resulted in high productivity and a strong economy. Your Lordships will be aware that in West Germany workers have been represented on supervisory boards for the past 25 years. Legislative arrangements also exist in France, Holland, Denmark and Luxembourg within the EEC and in a number of other European countries. Thus, it is completely understandable that the Commission of the European Communities has made proposals to the Council for some form of harmonisation in this sector. They have stated that in their view is it clear from the developments which have been, and still are, taking place in many Member States, the time is ripe for the reform of certain social institutions, including companies, in order to take account of important evolutions which have been gathering momentum for some time. Their aim has been clearly expressed: to provide legislation which will create a framework, taking into account current developments—social, economic and political—and in as flexible a manner as possible, so that advances can be made towards the attainment of the natural and genuine extension of democratic principles they wish to see in the Community. The Government support this view. I will therefore turn to the two documents themselves.

The draft Fifth Directive was first submitted to the Council in 1972, mainly as a result of work and debate on the Statute for the European Company, which had been published in 1970. The European Company Statute, among many other matters, had laid down fairly rigid principles of worker participation—a mandatory requirement for a two-tier board, a supervisory board consisting of three equal parts, representation on a works council and so on. The draft Fifth Directive concentrated attention on this particularly sensitive area. However, it did not make any progress through the Council before, in November 1975, the Commission published its Green Paper in an effort to stimulate and consolidate public opinion.

Your Lordships will be aware that the Commission's intention is to revise the text of the Directive as a result of the debate on the Green Paper and after taking into consideration the comments of the European Assembly and Economic and Social Committee. We await the publication of the new text of the Fifth Directive, which we understand to be likely during the first half of this year. As a result, it would be true to say that the Directive as it now stands is rather out of date and no longer a live document. I think it would be helpful, therefore, if I were to concentrate on the Green Paper itself.

As your Lordships are aware, the document discusses at some length the requirement for, and the problem of, introducing employee participation at board level and the proposed future companies structure in the European Community. It particularly recommends that a dualist board system and employee participation on the supervisory board are valuable and realistic objectives, and that action should be taken on the associated issue of employees' representative institutions, namely, works councils. However, to reach these objectives, it strongly endorses the need for flexibility in each Member State and proposes that they be approached by stages. The Government welcome this policy and, as I shall mention later, discussions with our European colleagues have given us much encouragement in removing any fears that the Commission will be pressing for a solution which is rigid and contains no room for manoeuvre to take account of the many and varied systems in each of the Member States. The underlying objective, which the Government support, can be fairly described as a means to provide a framework in which employees are ensured of a role in the processes of taking decisions about matters affecting their work, status and livelihood. In not making formal proposals, the Paper commends to serious and constructive debate its proposed common guidelines that would allow the consideration of a number of alternatives.

From what I have said so far, I think it can be seen how the Government stand in relation to the European harmonisation programme of industrial democracy. My right honourable friend the Secretary of State for Trade said in his Statement on 26th January that the Government were committed to the principle of worker participation and to the trade unions essential role in this. I would therefore re-emphasise that it will be Government policy first to reach conclusions that are satisfactory to this country, and that this must be regarded as our first task. While achieving the eventual solution, it would of course be wrong to ignore the experience available to us on the Continent and to European proposals such as those in the Green Paper. In fact, the Secretary of State has already visited West Germany to study their experience at first hand and he intends to visit other EEC countries in the near future.

However, it must remain our priority to develop a system suited to the needs of our own country, and only when this has been evolved can we reach conclusions on harmonisation. I must emphasise that these principles will in no way prevent or deter us from taking part in discussions in the EEC concurrently with resolving our own problems. It may not be possible for our delegations to take up a firm position on many matters in these discussions until we have reached conclusions on our own system, but there is no reason why we cannot make constructive and helpful efforts in the furtherance of European harmonisation in this field.

I believe that what I have said will have given your Lordships an answer to some of the recommendations in Part III of the Select Committee's report, and it would therefore be right for me now to turn to the report itself. The Select Committee recommended that the Bullock Committee should take account of the matters raised in Part II of its report, and while of course I cannot speak for the Bullock Committee, it may be useful if I draw attention to some aspects of that report which are relevant to the Select Committee's recommendations.

The Select Committee has drawn attention to the changes in the very nature of a company, and in particular to the relationship between director and shareholder, and poses the question whether the board should be able to override decisions of the general meeting in certain circumstances. The Bullock Committee clearly recognised that where there is a situation where employee representatives sit on the board as of right, some fundamental changes would be needed. For that reason, the majority of the Committee recommended that, while leaving the shareholder the ultimate decision on such matters as dividends, changes in the capital structure of companies and winding up, these decisions should be taken only following a recommendation from the directors.

The Bullock Committee, while recognising the fundamental changes these recommendations entail in the legal rights of shareholders suggest that because of the way these rights are exercised in practice its recommendations would bring the law more into line with current practice in large companies. Noble Lords will also be familiar with the formula which the majority of the Committee recommended should be adopted to avoid the possibility of deadlock arising from a situation where shareholders and employees each had 50 per cent. of the seats on the board. Some of these recommendations of course have proved to be very controversial and we shall naturally be consulting about them.

The Select Committee, in its statement of its opinion, also draws attention to the powers, responsibilities and duties of directors as they exist at present in our law, and to the difficulties that might result from the changes in these that might be necessitated by the adoption of a two-tier board system, or of employee representation on company boards as envisaged by the TUC in their booklet, Industrial Democracy, and in their evidence to the Select Committee. Your Lordships will be aware that the majority of the Bullock Committee were of the opinion that difficulties in the separation of directors' powers and duties between the two elements of a two-tier board system were such that any legislation to introduce such a system would have to be unacceptably formalised and rigid. While this is an aspect of the two-tier approach which clearly needs careful consideration, I should like to emphasise that the Government have not closed their mind on this subject. It is undoubtedly true that two-tier systems have worked well in other countries, and we are ready to consider all the arguments that may be deployed.

On the question of the duties of directors, noble Lords, will have noted—with approval, I feel sure—that the Bullock Report recommended that all directors, however appointed, should have the same duties and responsibilities. I note that the noble Baroness, Lady Elles, indicated her feeling that that should be so. It also recommended—and this, I am sure, met with general approval—that directors in discharging their duties to the company should have regard to the interests of employees as well as other interests. As the Select Committee noted, this requirement raises some questions of interpretation and definition which are at present being carefully considered by the Government.

The report of the Select Committee also raised the question of the appointment and removal of employee representatives. As the House will know, the Bullock majority report discusses this whole subject at some length and comes to the conclusion that this should be organised through the unions acting together in a Joint Representation Committee. This, of course, has been one of the most controversial issues in the Bullock Report, and I will not comment on it further today, save to repeat that this is one of the areas in which the Government are at present carrying out further consultations.

The last problem to which the Select Committee drew attention was the need to provide for the continued co-ordination and control of groups of companies by their parent. This, too, is a subject which the Bullock majority report covers in some detail and, as noble Lords will know, its recommendations are designed to meet the point identified by the Select Committee. Indeed, the report acknowledges that companies with over 2,000 employees are normally members of a wider group, and hence this is a matter of considerable importance. I can only add that the Government are similarly seized with the magnitude of this issue and the need for their legislative proposals fully to take account of it.

I would therefore wish to close by stating my appreciation once again for this opportunity of expressing the Government's intentions and stating my belief that this has been a very useful and, indeed, necessary debate, so that the views expressed by noble Lords during the debate on the Bullock Report can be properly extended to the European context. Once again, thank my noble friend Lord Mais for having given the House this opportunity.

6.17 p.m.

Lord MAIS

My Lords, I do not wish to delay your Lordships longer than necessary, but I should like to deal with one or two points which were raised during the debate. The noble Baroness, Lady Elles, asked why we did not include the CBI among those who gave evidence. In fact we took evidence from the CBI on the Second, Third and Fourth draft Directives and perhaps the noble Baroness will bear with me if I suggest that I should tell her outside this Chamber why we did not ask the CBI for the Fifth Directive.

The noble Baroness referred to the success of German industry and other noble Lords also mentioned this. I believe that we would all agree that the whole structure of German unions is very much responsible for this, in that their unions are industrially rather than trade based, as is the case in this country. I feel that we should take some credit for that fact, in that the system was set up by this country. One might sometimes say that there are advantages in losing a war rather than winning it.

My noble friend Lord Rhodes, with his usual eloquence, defined what he considered should be the areas of responsibility for the supervisory board. So far as I can see, it is essential that it should restrict itself to accountability, policy and finance and that it should in no circumstances become involved in the day-to-day running of the business. The noble Baroness, Lady Seear, also referred to the question of the establishment and the great need for works councils. Of course, with the two-tier system, one would have the works council below the management board and it would be between the works council and the management board that I would envisage that the day-to-day running, industrial problems and labour relations generally would be dealt with. They would not reach the supervisory board except as a last resort.

My noble friend Lord Houghton asked this question: Having taken note, what now? May I suggest, as I suggested earlier, that Bullock, though it is not exactly dead, is failing fast. I feel that, in the report we are discussing, there is the basis of a workable alternative. I hope that it will be pursued on those lines. I should like to say how much I welcomed the comments of my noble friend Lord Oram and his reaction to the question of the responsibility of directors. This is a terribly important point for all industry, no matter the field in which it operates. One cannot have two sets of responsibility on any board and run it successfully. Sooner or later, it would be bound to lead to difficulties and misunderstanding, and it would certainly prevent a harmonious existence between both sides. In fact, it would tend to divide rather than unite the board. I should like to thank all those who have taken part in this debate this afternoon. May I say that the interest taken in this matter is most encouraging. What has come out of this is that we are not doing so badly in this country as the media would sometimes have us believe.

In my experience, and I think in the experience of most of us, the very large majority of the companies in this country are operating harmoniously, and there is nothing like the industrial dispute that is suggested. It is always magnified out of all proportion, and although we have had some very serious cases lately, generally speaking there is a good relationship between the boardroom, management boards, or whatever they are, and the shopfloor. I fear that we do ourselves a great disservice in making as much of this as we do and making nothing like enough of what industry in this country achieves, has achieved in the past, and, we all hope, will achieve in the future. Once again, I thank noble Lords for taking part in the debate.

On Question, Motion agreed to.