HL Deb 18 May 1988 vol 497 cc380-406

6.53 p.m.

Lord Bruce of Donington

My Lords, I beg to move that the Bill be now read a second time. If noble Lords do not already know, they will be sorry to learn that unfortunately the promoter of this Private Member's Bill, Sir Brandon Rhys Williams, died in the small hours of this morning. I am sure that the whole House will wish to send a message of sympathy to Lady Rhys Williams and their three children.

Noble Lord

Hear, hear.

Lord Bruce of Donington

My Lords, he fought his last illness with great bravery and it is a shame that at the early age of 60 he should be taken from the House in another place and from us in this House.

For some time Sir Brandon Rhys Williams fought a battle for what he conceived to be the rights of ordinary shareholders in large companies. He wrote several works on the subject, among which I commend to your Lordships his book entitled More Power to the Shareholders.

I should like to explain how I, who belong to the opposite political party to Sir Brandon Rhys Williams, find myself in the position of moving the Motion today. On 28th April of this year I received a telephone call from Sir Brandon Rhys Williams. He was in hospital and he asked me to see that his Bill is passed through the House of Lords because it is a non-party measure which has the support of nine prominent Members of the Conservative Party in another place, a Member of the Labour Party and a Member of Plaid Cymru. It went through the House of Commons on the nod. I looked in the House of Commons record on the subject and found that it had given him leave to introduce the Bill on 22nd March of this year. It passed through all its stages on 15th April. I looked at Hansard and there it was. The entry contained 12 lines indicating Second Reading, Committee, Report and Third Reading. In due course the Bill came to your Lordships' House.

The moment I learnt of that and checked it I went to my Whips and said: "The Bill will go through as a formality. Do you mind if I propose it?" They raised no objection and so I went to the Government Whips' Office and asked if I could have a date. They said that it would be 18th May and asked how much time I required. I said that on the basis of its performance in another place I thought that two minutes would suffice. I thought that I would merely say, beg to move", and that the Bill would go through all its stages.

From that moment onwards all hell broke loose and the the CBI erupted. The noble Lord, Lord Mottistone, who will presently move an amendment, indicated that he wanted the whole issue postponed for six months. The Motion that he will move to that effect will virtually have the effect of ensuring that the Bill goes nowhere. Moreover, noble Lords must believe me when I say that I thought I would speak for two minutes and that the Bill would go through on the nod. However, today, instead of a comparatively small debate we have no fewer than 17 Members of your Lordships' House who wish to speak on this subject. They include some of the leading captains of industry who are easily recognisable.

In order to avoid any misunderstanding as to the contents of the Bill, it would be right to acquaint your Lordships with the provisions. It has only three provisions. In the case of public companies it provides that its directors shall state, which, if any, of the directors at the end of the relevant financial year were independent directors.". That is all they must do—just state that—and it is all that is required for the information to the ordinary shareholders. I cannot see that that smacks of dictatorship. I believe that it is a normal concomitant of the new capitalism, as described by the Prime Minister, where shareholders should receive information of that kind.

The second provision, together with the third, relates to what is described in the Bill as a "major public company". Within the terms of the Bill, a major public company is one that has an annual trading figure of £300 million and at least £100 million in its balance sheet total and employs over 2,000 people. I believe that there are some 250 to 300 in the country. They are very big and very powerful.

Sir Brandon's Bill requires, first, that in the case of major public companies the directors shall state whether it is their policy to make appointments of independent directors. That is all. The Bill does not require the directors to appoint them. I should have thought that that was fairly innocuous.

The second provision of the Bill relating to major public companies is that all the shareholders should be afforded the opportunity at an annual general meeting to say whether they wish an audit committee to be appointed comprising independent directors. Nothing in the Bill says that the company must appoint them willy nilly by virtue of the Bill. It provides that shareholders may be given the opportunity to decide whether such an audit committee should be appointed. If a majority of the shareholders decide not, that is the end of the matter. The Bill does not order that they shall do so. All that these powers mean is that the shareholders, if they wish, can decide upon these principles.

I know that in the course of the Bill—it would follow—there are definitions of the duties of such an audit committee when appointed. There is laid out a schedule of the proceedings that take place in the audit committee. The conditions under which the audit committee shall report to the directors are described. There is also a definition clause that seeks to define what an independent director is.

I willingly concede, as Sir Brandon conceded, that there must be ways of defining "independent director" more precisely. These, I submit, are Committee points. Similarly, some changes may be desired in the way that the audit committee itself is comprised and in the manner in which it conducts its affairs. There may be such variations. Indeed, I discussed them with Sir Brandon when he was still alive.

I submit that nothing in the Bill should have sent such a tremor of terrified horror into the august ranks of the CBI. Indeed, I am given to understand that the CBI is not without representation in another place any more than it is without representation here. How come that the CBI did not know what was happening in another place? I do not want to make too much of it, but it does not smack of too much efficiency to me. I should have thought that the most minute attention would have been paid by the CBI and its members to the proceedings in another place.

I submit that the Bill in principle should be given a Second Reading by the House on the basis of establishing the complete validity of the principles with which I have endeavoured to acquaint your Lordships. Either people's capitalism means something or it does not. The general public, or those who have the money, were told in the privatisation campaign that they were now going to become capitalists, which means of course that they would have some power. If their shares entitled them to no more than the same kind of privileges but without the security that a building society deposit would give them, there would seem little point, while of course asking them to subscribe to shares, in calling it a popular capitalism because, on the face of it, the CBI and its august members would seem to be unduly sensitive about the matter.

One is well aware that the larger companies—though not all of them—are director controlled. The directors may have only a minority of the shareholding themselves. Their shareholdings may be widely diffuse. It is so in some cases; it is not so in others. I am reluctant to think that the CBI will throw its weight behind directors purely because directors do not want shareholders nosing into the business that they control, as that would surely be an unworthy posture of the CBI.

I come now to the position of the Government in this matter. They had an opportunity of considering a Bill in May 1987. They considered it in Committee, and were most helpful to Sir Brandon Rhys Williams. It went through with the approval of the Committee, which had all parties sitting upon it. Then it could not be taken because of the pressure on parliamentary time in the 1987 session. My friend—and I call him that—Sir Brandon Rhys Williams, benefiting from the counsel that he had received in the meantime to improve it slightly, then brought it back.

What is the attitude of Her Majesty's Government? I am given to understand that it is one of neutrality. What a posture for a government supposed to be full of dynamic and to have the positive or negative answer to everything! If that be the attitude of the Government, I suggest that it reflects a weakness that has so far remained concealed but apparently can be concealed no longer. One can almost say to the noble Lord: why—what stretch of the intellectual perception is necessary to say "Yes, we approve it" or "No, we do not"? What ambiguity of policy, what nod from the Prime Minister, is necessry before an imprimatur of either yes or no can be given to a Bill of this kind? Why the paralysing, shivering indecision? Is it because Her Majesty's Government are afraid of the CBI? The noble Lord of course will have much to answer for.

I hope that the House will give the Bill a Second Reading. That will enable the House and the country to arrive at a decision on whether the principles that I have outlined, which I have not sought to stretch in anyway and which are in the Bill, are broadly acceptable with the oft expressed desire to protect the interests of the small shareholder. I concede that, there may be parts of the Bill, more particularly the detail, that may give rise to legitimate arguments. I shall seek to answer or to accommodate on behalf of Sir Brandon Rhys Williams, as many of those as possible. Tonight I cannot speak for my party but, as your Lordships' will be well aware its position will be in the very capable hands of my noble friend Lord Williams of Elvel.

I hope that the House may find that in the present circumstances the decent and honourable thing to do is to allow Sir Brandon's Bill to have its Second Reading. I beg to move.

Moved, That the Bill be now read a second time.—(Lord Bruce of Donington.)

Lord Mottistone rose to move as an amendment to the Motion that the Bill be now read a second time, to leave out ("now") and at end to insert ("this day six months").

The noble Lord said: My Lords, I am indeed sorry that Sir Brandon Rhys Williams has died. For perfectly genuine reasons I did not have the privilege of knowing him, but he was obviously an important Back-Bencher in another place who had the courage of his convictions. That stands out from this Bill. It is extremely sad, that he should have died this very day. I have spoken with people about whether or not to postpone consideration; but, on the whole, I think perhaps not. We have consulted the Clerks on this matter. The Bill may have been initiated by Sir Brandon and could be described as his Bill, but once it appeared before Parliament it became Parliament's Bill. It is as Parliament's Bill that we should consider it today.

If, as I hope, your Lordships will back me, my amendment will dispose of the Bill for the rest of this Session. I am fully aware that by convention we do not normally treat Private Members' Bills from another place so drastically. However, this is no normal Bill and it has arrived before us somewhat unusually. The convention to which I have referred is normally exercised for balloted Bills that reach us. This Bill was a Ten Minute Rule Bill which slipped through all its stages in under an hour and when few people knew that it was being taken. The CBI, which is advising me on this matter, knew that there was such a Bill but did not receive the usual warning that it receives when company Bills are being taken. Indeed, it had no warning at all.

It is not reasonable of the noble Lord, Lord Bruce, to imply that the CBI was somehow deficient in this area. There are arrangements that take place but in this case they did not. One may question why that was so, but it is old history and is not the point. It is relevant in this case because it means that this is an unusual Bill. Therefore, I believe strongly that this Bill—the previous versions of which have failed in another place over 15 years—is a had Bill and it is proper for us to reject it.

The Bill is bad because it stems from the draft European Community Fifth Directive and the draft Vredeling Report which proposes a form of two-tier boards on the lines of company direction in Germany, both of which directives were rejected by your Lordships' European Community Select Committee about 10 years ago. Although the Bill does not produce the same two-tier boards as Vredeling, it effectively undermines the unitary board structure as practised in this country to our own very great advantage. For example, Germany is in sharp decline at present, industrially. There was an excellent article explaining this on page D9 of The Sunday Times last week emphasising the fact that the fall in competitiveness was due in no small measure to the Germans catching what used to be called "the British disease"; namely, wages too high for work done, inflexible working practices, etc. Although the article does not say so, a strong contributor to the German decline will have been the two-tier boards because they divide and weaken the authority of top management.

Britain's top management was weakened in other ways in the 1960s and 1970s and we do not want that situation to return ever again in any form. The Bill seeks to establish by law, as the noble Lord, Lord Bruce, has told us, that all companies employing more than 2,000 people should have at least three non-executive directors—I call them non-executive directors although they have a different title in the Bill—who shall form an audit committee half of which shall be non-executive with a non-executive chairman. Ironically, the CBI is currently encouraging voluntary adoption of just about the same system in all companies. Furthermore, most medium and large companies already have non-executive directors and many also have audit committees.

Your Lordships might therefore wonder why it is so terribly wrong to confirm this practice by statute. The trouble is the small print in the Bill. Voluntary audit committees are now formed by companies from wise and knowledgeable, mainly non-executive, directors because the companies want the kind of advice that such committees can provide. There is no question but that the audit committee is other than subordinate to the main board and its reports are made accordingly. The schedule to the Bill gives much independent power to the audit committee and in paragraph 16 it makes the audit committee report directly to the shareholders. This feature alone, I suggest, introduces two-tier boardism with all the disasters of divided control that can stem from it.

Although the schedule is nominally voluntary guidance—it says so in the Bill—it is not hard to see that its very existence will gradually create a demand for its enforcement; insidiously, company by company. Thus the Bill does not harmlessly enact a good practice which the CBI encourages; it creates a monster which could destroy a good company from within. In any case, if we have a good practice used sensibly by successful companies and encouraged by the CBI, why enforce it legally with all the dangers that could come from that?

I trust therefore that your Lordships will support my Motion. I note that there are many noble Lords who are to speak. I thank them very much because I believe that some of them may agree with me on this point. I hope that for the benefit of all they think it suitable to say a few words in support but to restrict their contribution to under a minute or two. I beg to move.

Moved, as an amendment to the Motion that the Bill be now read a second time, to leave out ("now") and at the end to insert ("this day six months")—(Lord Mottistone.)

7.19 p.m.

The Earl of Halsbury

My Lords, I am greatly obliged to my noble friend Lord Milne for allowing me to intervene in the debate at this point. Sir Brandon Rhys Williams was my cousin and my friend. He was 20 years my junior and I had known him from the day he was born until this morning when he died in the small hours. Nothing is sadder for a person in my age group, as he totters into his ninth decade, than to watch the departure from active affairs of younger people who had so much promise and so much to give.

Heroically, he arose from his deathbed to move the Third Reading of the Bill in the House of Commons. Last week, knowing that his life was ebbing to its close, he sent me a message. He asked me to support my noble friend Lord Bruce of Donington on the Bill. I sent him a message saying that I would. Having given my word, I must keep it. My noble friend must therefore accept that if he needs a Teller at the end of the debate there will be at least two of us.

I do not want to oppose the temperate speech of the noble Lord, Lord Mottistone, with whom I have been friends for many years, as I was with his noble father for many years, but he has produced what I might call a battery of industrial heavyweights in support of his thesis. I have to ask myself: does he represent the voice of British industry or the voice of British industrial complacency? I regard myself as a British industrialist who in permanent opposition to British industrial complacency has forged a career. Before I was 30 I had conceived an industrial process, built the plant to operate it, taken the product on to the road and sold it at a profit, and then passed on to my text task. I ask all those who think they stand for British industry as opposed to British industrial complacency whether they did what I did before they were 30; and I have been doing it ever since. Many of them seem to be administrators, share manipulators and merger administrators, but have they ever held in the hand the product they designed? I ask them to ask their consciences whether that is so before they oppose the views expressed by my noble friend Lord Bruce of Donington.

I think I have said enough to comply with the pledge I gave to my counsin that I would support the noble Lord, Lord Bruce, in his promotion of the Bill.

7.23 p.m.

Lord Milne

My Lords, I rise to support the amendment in the name of the noble Lord, Lord Mottistone. I believe that the Bill is unnecessary. Most of the large groups already have an audit or a similar committee, while the principle of the non-executive or independent director for quoted companies is well accepted. It is untimely because directors are still reeling from the weight of unassimilated legislation of the past three years. It is impractical. When it is already difficult enough to recruit non-executive directors it will place upon them duties which I would not relish and which some, if not professionally qualified, will not be capable of carrying out. In an acquisition or takeover, when time is all important, separate reports are almost impossible. Any director who has been involved in a takeover will know the truth of that statement.

This brings me to what I think is the most unfortunate attitude of the whole Bill. It is thoroughly divisive. It introduces a "we" and "they" concept into company management. At paragraph 15 of the schedule the chairman of the audit committee is required at the annual general meeting to read out a report on the board of which he is a member. I dread to think what the noble Lords, Lord Hanson, Lord Weinstock or Lord Forte, who I see in his place, will say. It might even be negative. The Bill virtually sets up a mini-board alongside the main board.

While I share the grief of noble Lords at the sad death of the author of the Bill, I would not wish to consider it in Committee and I therefore support the amendment proposed this evening.

7.26 p.m.

Lord Lucas of Chilworth

My Lords, I rise to support my noble friend Lord Mottistone in his amendment but at the outset I should like to endorse what the noble Earl, Lord Halsbury, had to say about the late Member for Kensington, a man of untold energy. It is sad that the efforts he spent over the years on Bills of this nature should be thwarted.

The Bill is intolerable in a number of respects. It is intolerable that a Bill of this kind should require that certain companies must state a particular classification of director, the first point in the division between members of a board, as the noble Lord, Lord Milne, pointed out. It is intolerable that shareholders should, subliminally, be advised as to what they should ask of their board at the annual general meeting.

I have never been a director of a public company but I have been a shareholder of a number of companies. Shareholders are well able to ask of their board at an annual general meeting almost anything they want, or find ways and means of having those questions raised. I do not believe that this subliminal interest, as set out in Clause 3 of the Bill, is in the best interests of the company. All directors, whatever one calls them—non-executive or independent—have an equal responsibility in the conduct of the company's affairs. That, in the light of recent examples of perceived failures to observe proper practices and procedures, may give rise to concern, but this Bill does nothing to deal with that problem.

It may equally be that changing conditions and new pressures on companies make reliance on custom and practice and personal relationships established over many years perhaps less sensible and appropriate. One especially significant feature of recent incidents seems to be that, at best, methods were lacking to ensure that board members and senior executives were informed about events, or at worst, the apparent ease with which a minority of directors and senior executives were able to conceal from their colleagues what was happening. It is not that the hitherto informal, and typically British, mainly unwritten framework within which most major boards tend to work has been wrong or is unworkable. However, there may be a need to bring some degree of certainty to the relationships between the board, the individual directors and the secretary and to the internal workings of the board.

I understand from the Institute of Chartered Secretaries and Administrators that it is not opposed to the introduction of audit committees by companies. However, it has reservations about a statutory requirement. That view is worth upholding in the course of this debate. Some parameters, within which improved self-regulation by companies must fall, are emerging. Any requirements must involve the minimum of direct legislation, the minimum interference with commercial activities and the minimum of bureaucracy within the company. I mentioned the Institute of Chartered Secretaries and Administrators because the company secretary is the only officer whose role is expressly defined. It may be that his or her responsibilities to and relationships with the board should be examined. Whatever may be deemed necessary, any change should be within the context of a review of company legislation; perhaps a total updating. Therefore, I ask my noble friend Lord Beaverbrook whether his department the Department of Industry—now I think called the Department of Enterprise, although perhaps it should be called the "Department for Enterprise"—has any such review and further action in hand?

7.30 p.m.

Lord Benson

My Lords, audit committees are a well-established principle of company administration. The accounting profession, of which I am a member, has advocated them for many years. I have publicly and privately supported them. I have sat on numerous audit committees, sometimes on one side of the table and sometimes on the other. The difficulty with this Bill is that its defects are so obvious and so deep-seated that I do not think it will be possible to tinker with it by amendment. For that reason I think that there is only one possibility and that is to take the Bill away and, if necessary, rewrite it altogether. I shall return to that point later in my speech.

Before I comment on the Bill's defects, I should like to make two general comments. The first is that audit committees are primarily designed so that the auditors can bring to the attention of the directors, especially the non-executive directors, points and matters arising out of the audit—that is, not just the audit of the parent company but the audit of all the subsidiaries, not only in the United Kingdom but also overseas. Occasionally the chairman of the board, or the board itself, will give the audit committee specific tasks. However, the way in which they now operate, and have done so with great success for many years, does not give the non-executive directors a supervisory role over the executive directors.

My second general point concerns the functions of the non-executive director. In practice a non-executive director's function is to provide general advice to the hoard. Sometimes—as in the case of audit committees—the chairman of the board, or the board as a whole, will ask the non-executive directors for such advice. However, the advice they give is related to policy and principle. They are confined to doing that because it is quite impossible for them to do anything else. Any attempt to invest the non-executive directors with greater powers and responsibilities is, I suggest, doomed to failure.

There are five defects in the Bill which make it impossible for it to continue in its present form. The first is that the apparent object of the Bill—certainly its effect—is to impose a policing or supervisory function on the non-executive directors over the executive directors. That is highly divisive and will be deeply resented by the executive directors. It is also a function which the non-executive directors—as I have just explained—are quite incapable of exercising. Apart from anything else the provisions of the Bill add a top hamper of administration, meetings and reports, which will only clog the administration of commercial and industrial companies. Companies are already over regulated and such an additional provision will merely add fuel to those flames.

The second defect is that Clause 3(a), which goes to the heart of the Bill, is totally unworkable. It provides that the non-executive directors should review the financial statements. However, there is no definition as to what "financial statements" are or as to the meaning of "review". I wonder whether it is realised just what financial statements really involve. They are prepared by the executive directors with the aid of subordinate staff. They have to comply with an enormous raft of particular provisions from the Companies Act and they must also comply with accounting standards. The possibility of non-executive directors making a review of such statements, which sometimes have taken weeks or months to prepare, is really ludicrous. Apart from anything else, many of the non-executive directors have no financial skill whatever; they are appointed for different purposes—for example, because of their skills in research, in personnel or in international affairs. Therefore to load them with the responsibility of making a review on something which has been prepared by the executive directors is out of the question. If financial statements have to be reviewed at all, the proper body or organisation to do it is the auditors. Such people are skilled in the task and they spend their life on the job.

The third defect is that if the Bill becomes enacted, every public company in the country will be required to state whether or not its directors are independent. Again, this leads to a misunderstanding of the role of the hoard of directors. The members of a board of directors have a collective responsibility for directing and administering the company. The idea that any directors can be identified as being independent is quite unrealistic and, if it is allowed to go through, it will mislead the public.

The fourth defect is this. There are many audit committees already in existence and others will be appointed. They work very well in practice. However, if the Bill goes through it means that some audit committees, appointed under the provisions of what will then be an Act, will have certain statutory obligations. As a result there will be a hotchpotch of audit committees up and down the country with differing responsibilities. The public will not know what an audit committee actually intends to do and what safeguards it provides. Again, the public will be misled.

The fifth defect of the Bill is that the definition of what is called an "independent director"—wrongly I think—is so narrow that it will be most unlikey that enough independent directors will be found to staff the boards of the companies to which the Bill is directed.

In any event, I think the Bill will be self-defeating. No responsible board I have ever dealt with would dream of appointing an audit committee which complied with the provisions of the Bill. They would know that it would be divisive; they would resent the task put upon the non-executive directors and they would know perfectly well that the non-executive directors could not possibly comply with the directives put upon them by the Bill. For that reason the Bill will fail, in any case, should it become an Act.

The other objection to the Bill is that it will imply in the public's mind the fact that the non-executive directors can give a much greater supervisory role than is possible—again the public will be misdirected, and misled. Therefore, for all those reasons, there is no alternative but to reject the Bill in its present form. In any event, I doubt whether legislation is necessary. However, if it is thought to be necessary, I should like to point out that the duties of non-executive directors have been well set out in authoritative publications for many years past. Oceans of professional ink have been used in defining the duties of audit committees and as a result of all that such committees have worked well.

If the introduction of a Bill is necessary, I suggest that it should be drawn from what is already in operation and already well documented in authoritative publications. However, there is one other alternative. If the Government are convinced that such legislation is necessary—although I think it unlikely—the proper place to implement it is in a revision of the Companies Act 1985. That will happen in any case probably next year or the year after in order to comply with the provisions of the European Community and its directives.

Under all those circumstances I suggest that the Bill should not receive a Second Reading.

7.40 p.m.

Lord Hanson

My Lords, I should like to associate myself with the tributes paid to Sir Brandon Rhys Williams. I should also like to say that the noble Lord, Lord Benson, has more than covered all the points that we consider to be undesirable about the Bill. However, my reasons for opposing the Bill and supporting the amendment moved by my noble friend Lord Mottistone are that it is unnecessary; it would be detrimental to industry and shareholders; and it is unworkable.

As your Lordships have heard from other noble Lords, the Bill would change company law as we have known it for generations, and known it to work successfully. The present system has been built up over many years, refined by voluntary means as needed, and has stood the test of scrutiny by companies' auditors, the Stock Exchange, the media, and, most important, the shareholders.

It is a system based on equal responsibility and mutual trust between executive and non-executive directors, meeting on a monthly, quarterly or annual basis to protect the interests of their shareholders, employees and customers. Surely there is a great deal to be said for that old saw, "if it isn't bust, don't fix it".

We in industry are not against the appointment of non-executive directors; we welcome them. We are not opposed to sub-committees, wages committees, charity committees, investment committees or even audit committees. What we do oppose most vigorously is the imposition by statute of a requirement that seeks to place non-executive directors in a position of having legal authority over that of the rest of the board.

I was recently a member of an audit committee of a major joint stock bank. As the noble Lord, Lord Benson, has said, its function was to examine the facts and figures, question management and the auditors, and then report back to the chairman and the main board for them to take such combined action, if any, as they felt necessary. That works very well.

The Bill would undermine the powers of the main board—the whole board—a board properly appointed by the shareholders. My 40 years as a director of many companies, private and public, at home and overseas, warns against a step that would be to the detriment of all major companies and would in no way help British industry.

From personal experience in business I say, away with restrictions. Regulations of this kind, in the midst of a most welcome upturn in the fortunes of British industry, will do nothing at all to increase our country's new-found prosperity. I urge the House to support my noble friend Lord Mottistone in his amendment.

7.43 p.m.

Lord Marshall of Leeds

My Lords, I also join noble Lords in their regret at the death of Sir Brandon Rhys Williams. Nothing I say, shortly I hope, in opposition to the Bill is to be taken as indicating that I am against non-executive directors. I have been one for over 35 years and I still am. Neither am I opposed to audit committees. I have served on audit committees. I currently serve on a voluntary audit committee.

Audit committees will be seen as the thin end of the wedge. I agree with my noble friend Lord Mottistone that in due course they will lead to a suggestion for two-tier boards. It is for those reasons that I say the Bill is ill-conceived. Many plcs currently do not have independent directors. That is either because they do not believe in them or because they just do not want them, or, if they do believe in them, they cannot get them. They cannot recruit them because they will not pay enough fees for them. A whole army of non-executive directors will be required if the Bill goes much further.

The undesirable consequences inherent in the Bill would be that the audit committee would be placed in a preferred position in regard to the consideration of financial material. Secondly, it would distance the auditors from all members of the board who are not members of the audit committee and vice versa. It would appear to authorise the audit committee to dictate to the board as a whole the matters to which it thinks the board should give its attention. That, I believe, is the consequence—whether intended or not—of Clause 3. In so doing, it would create first and second-class board members. In plain words, it would be a denigration of those directors who are not selected to sit on the audit committee. It would delay the provision of financial information for the entire board. It would run completely counter to the concept that all directors are, in the eyes of the law, responsible and liable to the shareholders for the proper conduct of the company. They are liable both individually and collectively; both jointly and severally.

I would not care to serve on any boad of which I was not a member of the audit committee. I have never been an executive director so I would have much more chance of being on the audit committee, if my age were not against me.

There is one final point, which I think is a serious one. Your Lordships will recall that the recent insolvency legislation has significantly enhanced the liability of directors when a company goes into liquidation and where the liquidator becomes a litigator and inquires into the company's affairs. There is now this new concept that without having been actively dishonest, a director can, by his passive indifference, or his failure to pay attention, place his personal assets at risk and put himself in the position of having himself declared by the court to be disqualified from acting as a company director for a period of years.

I remember that the noble Lord, Lord Bruce of Donington, was much involved in that Bill in the House. It would be an ironic mitigation for any company director who falls foul of the company insolvency laws to be able to plead that as he was not on the audit committee he received only a garbled ex post facto statement from the audit committee as to the financial state of the company, and that it was rather too late for him to do anything about it. He could have his personal wealth put at risk.

It is because I feel that the concept of the single-tier board should not be eroded that I believe it would be wrong to dictate that the concept of audit committees should be put on the statute book. It is also wrong for the appointment and remuneration of auditors to be removed from the decision of the board as a whole and to be vested instead in the audit committee. The Bill will not commend itself to many people in business and commerce. For those reasons I support the amendment.

7.48 p.m.

Lord Wilberforce

My Lords, I hope that I may be permitted to add my voice to those who have paid tribute to the sponsor of the Bill in another place. Like the noble Earl, Lord Halsbury, I can claim that Sir Brandon was related to me by marriage. I live in Kensington, which he represented with such distinction for a long time. Apart from those connections with him, I long admired him in politics as an independent and socially-minded advocate of useful reforms. If there is one thing for which he was renowned it was for the care with which he consulted interests which might have been involved in any legislation. One has seen that in many other measures he brought forward.

I refer to Sir Brandon Rhys Williams's speech in another place on the First Reading of this Bill. He consulted the following bodies: the Bank of England, The Stock Exchange, the Takeover Panel, the CBI, the Institute of Directors, the Institute of Chartered Accountants, the Chartered Association of Certified Accountants and colleagues on both sides of the House, with useful hints from the Department of Trade and Industry. It cannot be said that wide interests have not been consulted, but perhaps one can weigh the benefits of those consultations against the powerful voices which have been heard this evening from one interest.

With some diffidence I raise only a small voice against a powerful artillery which has been assembled against the Bill. However, I suggest that this is not a monster of a Bill in any sense. It is a modest but useful piece of legislation. Let us consider why we need it at this point. I believe that there is a greater need now than there has ever been for understanding and openness about the financial affairs of our great companies. They no longer simply make articles and sell them. They engage in an enormous number of very complicated activities involving huge sums of money. They are managing other people's money in the institutions and pension funds for private shareholders. Necessarily, and often beneficially, they engage in huge financial operations, mergers, takeovers and so on. In principle it is surely good that greater openness as regards the shareholders should be available and should be taken into account by those who ultimately own the companies.

There is nothing very terrible about audit committees. Many speakers have pointed out that they exist anyway and have been found to be very useful, and that in effect this Bill comes very near to what is already a fairly good and well established practice. One has to bear in mind that auditors of the great companies are not always independent and certainly not independent of the board. In some cases to have another committee looking at the financial statements can only be for the benefit of the shareholders.

As to outside directors—and I use the word "outside" at the moment without prejudice—many speakers have said that they recoginse their value. They exist in a number of our greatest companies. They are liable to have not much to do until calamity strikes, and then their role becomes very important. This Bill gives them a little more power and a few more duties but not—and I shall return to this—in any way a divisive power. I believe that it is a misconception that their power is divisive. That misconception lies at the root of much of the opposition of the Bill and is not well founded.

This is a permissive Bill and is in no sense authoritarian. It does not impose anything on anybody. It leaves everything in the hands of the shareholders. There is no obligation on anybody to set up an audit committee. It says that an audit committee may be established by ordinary resolution. Everybody who has been to a general meeting of a company knows perfectly well that an ordinary resolution with a large number of shareholders is a fairly difficult measure to pass if the board opposes it. The chairman will be there with a whole sheath of proxies in his hands, and large institutions will have made up their minds. However, unless the shareholders, supported by the board or at least by the major institutions, wish an audit committee to be established it will not be established.

In essence this Bill enables an audit committee to be set up without the necessity of altering the articles of association. Any meeting of a company altering the articles with a three-quarters majority can set up an audit committee. The Bill simply gives power to the shareholders without the necessity of altering the articles if they wish and if they can muster the majority of an ordinary resolution to set up an audit committee. The directors can oppose it and if they do it is not very likely that it will be carried.

I shall not deal in detail with some of the points urged, particularly by the noble Earl, because I feel sure that the noble Lord who sponsored the Bill will reply more effectively than I can. However, perhaps I may make a few points which are contrary to the suggestions from previous speakers. First, there is no imposition on any company to appoint independent directors. It does not, as I have seen the CBI suggest in correspondence, fix a set number of independent directors. It does not create any obligation to appoint any independent directors. It merely states that if there are no independent directors, that that should be reported to the shareholders and one then has to see what happens. There is no mandatory obligation to appoint independent directors.

The second point—and I have already made this to some degree—is that there is no compulsion for an audit committee. One cannot be set up without an ordinary resolution and that depends either on the wishes of the directors or the institutions.

Thirdly, and I believe this to be very important, the Bill does not promote or encourage a split in the board of directors. It does not create a division on the board between one set of directors and another. One has only to look at the schedule to see that the audit committee is a committee of directors and not a particular section of directors. Paragraph 1 states: The audit committee shall be composed of such directors of the company as the directors shall determine". It is simply a body of directors.

The schedule goes on to say that there have to be at least three independent directors, and there must be as many independent directors as there are ordinary directors, and it gives a casting vote to the chairman. If anybody is afraid of that let them amend the schedule by taking out the casting vote of the chairman. If they wish, let them give the majority vote to the ordinary directors.

However, the concept of the schedule is perfectly sound, is it not? It does not create a separate body over and above the board of directors. It creates a committee of the directors to do the job which the audit committee should do. What is it to do? It merely reports to the directors. It does not override anybody. It does not take over the powers of the directors. It reports to the directors and the directors have to decide what to do.

A reference was made by one noble Lord to paragraph 16 of the schedule, which says that it has to be attached to the balance sheet and read before the company in general meeting. If anybody thinks that that is too strong meat, let them take it out. There is liberty to amend the schedule. A company does not have to adopt the schedule if it does not want to. It can produce its own regulations. If noble Lords feel that its presence in the optional schedule is too strong, let them move to have that paragraph taken out.

Fourthly—and this is a development of the same point—it does not set up a supervisory board German style. There is no foundation whatever for saying that. Why frighten us with a supervisory board German style? Why frighten us with European directives? This matter has nothing to do with that at all. It creates an audit committee of the directors. There is no separation of one board above another and no interference with the directors' powers.

One can argue about many of the directors. If this Bill continues I shall want to say something about the definition of an independent director, which is taken from the Insolvency Act 1986 and is an enormously complicated definition, involving nephews, persons associated in all sorts of ways and so on and so forth. I should want to have some restriction and clarification placed on that section of the Bill, but that is a matter which can be discussed in Committee.

I suggest that the principle of the Bill is quite harmless. If one wished to criticise one could say that it was not strong enough and that it has not got enough teeth in it; it is too permissive and too gentle. But to describe it as a monster imposing all kinds of unacceptable restrictions on boards of directors and creating a division within them represents a misunderstanding of the Bill. I am afraid that I have spoken for too long. But with such vigour as I can command from these Benches, I venture to suggest that the Bill should be given a Second Reading and if necessary be approved in Committee.

8 p.m.

Lord Rippon of Hexham

My Lords, I wish to be associated with the tribute paid by the noble Lord, Lord Bruce of Donington, to Sir Brandon Rhys Williams and with his expressions of sympathy to Sir Brandon's family on this sad day. He was a friend and colleague of mine for many years both in another place and in the European Parliament. In both places he played a notable part particularly in promoting social and economic ideas.

Undoubtedly the provisions of this Bill were a matter close to his heart. He presented a similar Bill over many years in the House of Commons. I am not sure that he had wholly recognised the extent to which the practice of appointing non-executive directors and audit committees had advanced but certainly he could have had no more worthy supporter and promoter of this Bill in the House than the noble Lord, Lord Bruce of Donington. I am sure that he would have appreciated what the noble Lord had to say.

As someone who has been a non-executive director and chairman of a number of companies, both industrial and financial, over a period of more than 30 years, I have no doubt myself of the importance of the non-executive director. I think that he plays an important part on the boards of many companies. Sometimes that is a different part and sometimes there are companies in which there is no need for a non-executive director. I thought that the definition of the role of the non-executive director advanced by the noble Lord, Lord Benson, was perhaps necessarily simplistic. It has, as he said, been the subject of much ink over many years. I gave a speech not so long ago which lasted 40 minutes to an American business graduates' association. Fortunately I have not brought it with me but I am sure of one thing and that is that I never suggested and I never would suggest that the appointment of a non-executive director should be mandatory.

Equally I can see that in many companies there is a value in an audit committee. It may depend on the size of the main board. Also, if there is to be an audit committee, I do not believe that that should be mandatory in any way and certainly the shareholders would not be in the best position to judge whether or not that was necessary. I do not think it should report to anyone but the chairman of the board as a whole.

I do not like the concept, however defined, of a so-called independent director. On all the boards on which I have ever served I have always seen the board as a team. It has been put together as a team and the members of the board fulfil different functions whether they are executive or non-executive. This matter must be left to the discretion of the board itself. But the board is appointed by shareholders and if at a shareholders' meeting dissatisfaction is expressed then no doubt note can be taken of that.

It has been said that this Bill is just guidance. I do not believe that legislation is the proper place for guidance nor do I think in this particular case that the guidance is necessarily right or appropriate. The public would obviously regard an Act of Parliament as not simply guidance. They would consider that it was intended to be implemented. To that extent it would be misleading.

I also take the view which has been expressed by various noble Lords that if there is to be legislation it should be legislation promoted by the Government as part of a general review of company law. I take up the point of the noble Lord, Lord Bruce of Donington. I cannot see any reason why we should not now, faced with a Bill which many of us believe to be fatally flawed and incapable of reasonable amendment, say quite clearly yes or no. For my part I shall support the amendment of the noble Lord, Lord Mottistone.

8.4 p.m.

Lord Bruce-Gardyne

My Lords, I too wish to join other noble Lords who have already spoken in tribute to Sir Brandon Rhys Williams. We served together in the House of Commons on and off for 15 years and he was a good friend. It is indeed tragic that he was unable to live to witness this evening's events as I am sure he would have wished to do, because, as a number of noble Lords have pointed out, he had promoted a Bill analagous to this one on numerous occasions over a great many years. I am sure that he would have wished to see the first occasion when this particular proposition got as far as it has.

I must admit that in the 1960s, when I believe Sir Brandon introduced his first Bill on this subject, he asked me to be a sponsor of the Bill. I had to tell him that I would not do that. I must honestly say that my reason for not doing so then was more or less precisely the same as the reason for which I shall be supporting my noble friend Lord Mottistone and his amendment tonight.

Let me hasten to say to the noble Earl, Lord Halsbury, that I would not remotely claim to belong to the battery of heavy industry. I do not think that I am even a bombardier in that respect. But I have served for the past 15 months as a non-executive director member of the audit committee of the TSB. So I have, not surprisingly, everything in favour of the propositions behind this Bill. But unlike Sir Brandon Rhys Williams and others who have spoken in favour of this Bill tonight I am bound to say that I do not believe that we advance this cause by the route of legislation. I am bound to confess that in general I have never subscribed to the view that legislation is conducive to the sum total of human happiness. I certainly do not think that that is the case today.

Above all I share the anxieties which have been expressed by a number of noble Lords about the inevitable division which this Bill would create inside the boardroom between what one might call the sheep and the goats. I am not quite clear whether it would be more invidious to be designated as a sheep or as a goat.

I listened with care to what the noble and learned Lord, Lord Wilberforce, had to say when he explained that there was nothing which imposed such divisions within this Bill but I have to confess with the greatest respect to the noble and learned Lord that his reading of the Bill is somewhat different from mine. For all those reasons I personally hope that your Lordships will decide that this Bill is not the right vehicle to achieve the purpose which many of us believe in—the desirability of major companies having on a voluntary basis an audit committee in which non-executive directors should be involved. I hope that your Lordships will agree to support my noble friend Lord Mottistone and his amendment tonight.

8.8 p.m.

Lord King of Wartnaby

My Lords, it is of course a sad time to be discussing this Bill. Therefore one feels perhaps a little inhibited about what one might say about it. But my noble friend Lord Mottistone has reminded us that this is now a Parliament Bill. I think it a clumsy, ill-considered piece of legislation. I am surprised that it received such scant attention in another place. No one is quarrelling with the view that audit committees and non-executive directors can and do make valuable contributions to our corporate affairs. Some of my best friends are non-executive directors. What the Bill seeks to do is to discriminate in an insidious way between the two categories of directors. The effect of the Bill would be to derogate from the collective unity and responsibility of the board. It would be interpreted as a move in the direction of a two-tier structure which this country plainly does not need and, on the evidence, does not want.

I am strongly opposed to dictating by statute the number of non-executive directors which a company shall appoint and to which committees they shall be appointed. Anyone who wants to gain a bit of experience in how a board is put together should become the chairman of a nationalised industry. That is something which anyone speaking on the matter should experience. I am strongly opposed to the prescription by statute to an audit committee of the functions stated in Clause 3. I am strongly opposed to making the appointment of an audit committee a direct and exceptional responsibility of the annual general meeting of a company in the way that is envisaged in Clause 2 of the Bill.

I do not doubt the good intentions of the author of the Bill. However, the protection of commercial integrity and the promotion of virtue are not achieved by a mechanistic approach. Some things can be achieved by legislation; some must be achieved by persuasion. If, by legislation, we require a corporation to appoint against its will and judgment a minimum number of outside directors, what calibre of directors do we think that company will appoint? How competently can we expect them to discharge the duties imposed on them? We may stipulate that the category of non-executive directors will be imposed on a company as guardian of its morals. Pray, who will guard the guards?

We should be well advised to scrap the Bill. If we feel that there is a need for a better understanding among companies of the importance and value of audit committees and the place of non-executive directors on the committees, we should listen not only to the advice of businessmen but also to the views of the professional institutes and representative organisations such as the Institute of Directors, the Confederation of British Industry—I am not in touch with them—and the Stock Exchange. All those bodies are in favour of greater use of non-executive directors. They have their own codes of practice and advice for members. They are opposed to the measures being enforced by legislation. It would be ill advised for us to disregard their views. I urge noble Lords to vote for the amendment.

8.15 p.m.

Lord Polwarth

My Lords, I speak for no particular interest and without the vast experience of some noble Lords who have spoken this evening. I speak with experience as at various stages an auditor, a non-executive director of various public companies, a non-executive chairman of two companies and a member of the audit committee of a major American corporation. Indeed, I have been the chairman of that committee for two years.

From my experience I believe in audit committees. They have a valuable function to perform. I hope that more British companies will adopt them. However, I hope that they will be adopted by companies in their own way and in their own time. Their great virtue is maximum flexibility in what they consider and how they consider it.

We found in the company in which I served that it was a marvellous opportunity for the chairman to confide in the non-executive director and to let his hair down. It was also an opportunity for non-executive directors to satisfy themselves to the maximum that they had done all they should to see that the company was being run properly. I do not think that that will be achieved by a measure as legalistic as this one, which will result in a straitjacket. I hope that we shall see more audit committees. I believe that we shall, and for that reason I do not support the Second Reading of the Bill.

8.17 p.m.

Lord Weinstock

My Lords, I am sorry to have missed the opening speeches of the noble Lords, Lord Bruce of Donington and Lord Mottistone. I was unable to arrive more promptly. I am also sorry to have learnt of the death of the mover of the Bill in another place.

I agree with the noble Lords, Lord Benson and Lord Hanson, that the Bill in its present form is neither necessary nor effective. In that sense I also agree with the noble and learned Lord, Lord Wilberforce, as to the modesty of the Bill. It is unnecessary because a voluntary code of recommended practice on non-executive directors was published in April 1987 with the imprimatur of the Bank of England, the Stock Exchange and the Confederation of British Industry. In September 1987 the Stock Exchange introduced an amendment to its regulations (21(T), Chapter 2 of Section 5) making it mandatory for listed companies to identify independent non-executive directors in their annual reports, complete with photographs.

The term "independent director", which appears to trouble the noble Lord, Lord Rippon, is not in that context so novel as was suggested in a letter published in today's issue of the Financial Times. The Bill is ineffective because, as the noble and learned Lord, Lord Wilberforce, has told us, it does not impose any obligation as to either of the matters with which it is concerned; the appointment of non-executive directors and the appointment of audit committees. It only requires that they be considered. Many public companies already have non-executive directors and audit committees. The GEC, for which I work, has six non-executive directors, all of them independent both financially and personally. We also have an accounts committee, which is approximately the same as an audit committee. On that committee non-executive directors form a majority. Similarly there is a directors' remuneration committee.

I doubt whether such arrangements would be thought objectionable by any serious manager. I do not share the view of the noble Lord, Lord Benson, that the first job of non-executive directors is to supply advice. Certainly that is a valuable function. However, I should have thought that the first duty is to see that the management of a company is competent and honest and that the interests of shareholders are not traduced.

If management does not believe that the appointment of independent directors is in the best interests of the company, its view is unlikely to be overridden by a shareholders' meeting. The restrictive definition of "independent" which is contained in the Bill makes knowing absolutely nothing about the company the only necessary qualification.

As to audit committees, the formal rules specified in the Bill are likely to make management less likely to accept it than it is now with the existing voluntary code. The Bill raises but does not answer questions about the responsibilities of non-executive directors. Would they bear heavier responsibilities than other directors? What special responsibilities, if any, do directors of audit committees have to shareholders? To what liabilities will they be exposed?

Perhaps more important is the fact that the Bill bypasses the serious consideration which will sooner or later have to be given to the Fifth Directive of the European Commission. At that time we shall have to confront such issues as two-tier boards, to which I understand there is strong objection in the CBI and elsewhere. We have heard some reverberations of those matters in your Lordships' House this evening.

There are certainly disadvantages to two-tier boards. There are also disadvantages to the present system. As things are today, accession to the main board of a big company is seen by executive managers as an important overt mark of success conferring business and social status, which are perhaps even more coveted than higher remuneration or other benefits. Who can blame them in our society? However, it can be rather a nuisance when there is not enough room round the board table! Too frequently such managers do not have sufficiently wide experience outside their own speciality. In contrast in the United States the position of company vice-president without a main board seat is readily acceptable to very senior executives.

These are serious matters and they need serious contemplation. If there is to be legislation it should be introduced by the Government and its impact on the Companies Acts taken fully into account. I suggest with respect that the best thing for your Lordships' House to do tonight is to accept the amendment of the noble Lord, Lord Mottistone, and take up the matter at the appropriate time and in the proper circumstances.

8.20 p.m.

Lord Williams of Elvel

My Lords, the House will be grateful to my noble friend Lord Bruce of Donington for taking up this Bill, which was passed under what Madam Deputy Speaker in another place described as extraordinary procedures. No government spokesman was apparently present to comment upon the Bill, and I must admit that no opposition spokesman was there to comment upon the Bill either. It went through in a rather curious manner.

The Bill was promoted by Sir Brandon Rhys Williams. I should like to say officially from these Benches how sorry we are that Sir Brandon is no longer with us. Although he was not of our political persuasion, over the years we have admired the effort and determination he put into the causes that he adopted. The fact that he was Welsh may have had nothing to do with that but it must certainly have contributed to the determination with which he pursued those causes.

The Bill which my noble friend has put before the House following Sir Brandon's efforts in another place arouses intense passions, as we have heard during the debate this evening. Like the noble and learned Lord, Lord Wilberforce, I am rather surprised that it arouses such passions. As he said, it is a permissive Bill. It allows a certain number of people to do certain things and it does not compel anybody to do anything.

I have listened this evening to very distinguished industralists—heads of important companies speaking on the subject. Not so very long ago in your Lordships' House we had a debate on business education. That is a very important subject. I believe that it is also very important to the noble Lord, Lord Young, and the Government. Not one of those distinguished industrialists who has spoken today addressed us on the subject of business education. I am sorry if special interests, if I can put it that way, come to the fore on an occasion like this, but the noble Lords do not attend for a general subject such as business education. I said that on a slightly sour note, for which I apologise, but I wanted to make that point.

I should like to spend a little time—but not too much time because I do not want to detain the noble Lord, Lord Beaverbrook, too long before he responds to the debate—on the substance of the Bill. I find the argument that it is in some way encouraging a two-tier board system to be quite extraordinary. I think that the noble Lord, Lord Mottistone, implied that the two-tier board system was leading Germany into some form of financial or economic crisis. I find that argument even more extraordinary. I do not believe that the Bill has anything to do with a two-tier board system. Anyone who has looked seriously at the two-tier board system—the Aufsichtsrat Vorstand and the Conseil de Surveillance Directoire system—and how it works (for, as the noble Lord, Lord Weinstock, said, we shall have to deal with all that in the course of time) and at the way audit committees operate in the United States will understand that there is a very clear difference between the establishment of an audit committee and a two-tier board system. I cannot take that argument very seriously.

I think that all noble Lords who have participated in the debate agreed that audit committees are desirable. I cannot think of any speaker who has said that we should not have them or that they are in some way wrong. The question is whether there should be a requirement in statute for shareholders to be able to ask for an audit committee. There will be those who will say, quite properly, that it should be part of Stock Exchange regulations or should be part of something else but should not be in statute.

Perhaps I may say to the noble Lord, Lord Lucas, that I found his views on this topic quite extraordinary. I remind him that only two years ago he was promoting the Financial Services Bill in your Lordships' House from the Government Dispatch Box. That Bill contained statutory definitions of practically everything one can think of. Here he is today saying that it is utterly intolerable that this kind of thing should be put into statute. I must say to the noble Lord in the greatest friendliness—for I am a friend of his although not in the same political party—that we cannot in this House have one attitude, even from the Government Front Bench, on one subject and another attitude on another subject.

Lord Lucas of Chilworth

My Lords, I am most grateful to the noble Lord, Lord Williams, but if he quotes me I should be grateful if he would quote me in entirety. I said, "By virtue of this Bill". I found it intolerable that the Bill should be used for this purpose. I concluded by saying that if change was necessary, it should come about within the context of the review of the Companies Act, and I asked my noble friend what was happening in that respect. That is rather different.

Lord Williams of Elvel

My Lords, I am most grateful to the noble Lord, but I notice that he did not tell me that my quotation of his use of the word "intolerable" in this connection was wrong. We have to take a balanced view as to what is proper in statute and what is not.

I found the arguments of the noble Lord, Lord Benson, to be well expressed and well balanced. He is in favour of audit committees. I hope that the noble Lord will intervene if I have misinterpreted him. He believed that the Bill espoused a good cause but was too flawed to be put into statute. I would agree with him that it espouses an appropriate cause but would argue that in Committee it could be amended to the point where it could be put into practice.

I believe that there are many points in this Bill which need amendment. If your Lordships give it a Second Reading we from these Benches will be moving amendments designed to clear up a number of points which have been raised by noble Lords this evening. We shall be looking at the question of independent directors. I believe with a number of noble Lords that that presents a problem as drafted. The definition is not right. We should like to see it, as one noble Lord put it, in a form in which someone who is interested in becoming a director can become a director rather than being excluded. We also believe and would like to incorporate into the Bill that representatives of employees should have a place and be entitled to a place on audit committees. And I hope that we will come to employee stock option programmes, if I may use the American expression.

We would wish to clean up the definition of financial statements. That is a point which the noble Lord, Lord Benson, raised. We would also like to clarify the relationship between what is included in a financial statement approved by an audit committee and what is approved by the board of directors as a totality under the terms of the Companies Act. My own view is quite plain. I think that the board of directors takes complete responsibility for all documents and all statements issued by companies. In Clause 4 we wish to redefine a number of expressions. We shall have many comments to make if your Lordships decide to give this Bill a Second Reading.

However, I come back to the principle. All noble Lords whom I have heard speak today have said that they are in favour of audit committees. I believe—although I have no evidence—that the Government are in favour of audit committees. If the Bill is not to be given a Second Reading, the Government have to make a commitment to bring forward legislation which will do what the noble Lord, Lord Rippon, said it should do, which is to consider, consult and bring forward legislation which will incorporate the measures contained in this Bill. Failing that from the Government, I ask your Lordships to oppose the amendment of the noble Lord, Lord Mottistone, and give the Bill a Second Reading.

8.31 p.m.

Lord Beaverbrook

My Lords, on behalf of the Government I fully support the compliments that have been paid this evening to Sir Brandon and to his persistence and tenacity over the years on matters including the one before us tonight, in which he passionately believed. He was a powerful advocate who earned widespread respect for the skilful and professional way in which he approached whatever task to which he set his mind. He will be a sad loss to Parliament and our sympathies go out to his wife and family.

Turning to he Bill itself, as has been pointed out, the Government have adopted a neutral attitude towards it. This is not because we believe that the matters that it covers are not worthy of attention. On the contrary, they are of major significance touching as they do on the way in which public limited companies conduct their business.

The Bill relates to two particular areas affecting the running of PLCs—independent directors and audit committees. The Government are among those who believe that independent or non-executive directors have an important contribution to make to the affairs of many companies. I do not think that anyone here tonight has said anything against the contribution that non-executive directors can make. We also believe—and I would say this particularly to the noble Lord, Lord Williams—that audit committees can play a valuable part in many companies and I know that business and accounting circles are becoming increasingly interested in extending their use.

But the Government believe very firmly that it should be left to a company's directors and shareholders to decide whether or not it should make use of either independent directors or audit committees. That is why we resisted for so many years the proposals which were regularly put forward by Sir Brandon. Although Sir Brandon's proposals changed in detail over the years, their common feature was a requirement that both non-executive directors and audit committees be made compulsory for some categories of companies. In the present proposals there is a major change from those earlier ideas. The purpose and scope of this latest set of proposals have already been explained in detail and I need do no more than emphasise that they now contain no element of compulsion. They do not attempt to take from shareholders and directors the duty and responsibility of deciding whether a company should have independent directors or audit committees. This aspect is fundamental to the Government's decision to take a neutral line on this Bill.

My noble friend Lord Lucas asked whether the Government have any general review in hand to update the totality of company law. There is no such review in hand but I have noted my noble friend's suggestion that when there is the subject should be included in it.

The Government would not themselves have brought forward such a measure. But with a Private Member's Bill, such as this, the issue for the Government is rather different and, all things considered, we do not see the actual proposals in the Bill as sufficiently objectionable to cause the Government themselves to oppose it. However, if the Bill proceeds to a Committee stage the Government will bring forward a series of technical amendments which will be designed to improve a number of drafting deficiencies in the Bill.

8.35 p.m.

Lord Bruce of Donington

My Lords, I am most grateful to those noble Lords who have taken part in the debate this evening. I am particularly grateful on behalf of Sir Brandon for the support from the noble Earl, Lord Halsbury, and the noble and learned Lord, Lord Wilberforce, as well as from my noble friend Lord Williams of Elvel. I must confess to some disappointment this evening with the contributions from some of those reputed to be among the leading industrialists and financiers in our country. It is quite clear from the debate that has taken place that some of them at least had not even bothered to acquaint themselves with the precise contents of the Bill. They must have been extremely grateful to the noble and learned Lord, Lord Wilberforce, for having given them adequate instructions where my initial speech must obviously have failed. It seems that the captains of industry are in favour of audit committees. Or are they? Some were, some were not. If they are set up voluntarily, completely ignoring the fact that this is precisely what the Bill does, it gives the company or its shareholders—for they are the owners—the option of appointing an audit committee by a majority.

There has been a mixed reception to the whole concept of an independent or non-executive director. Some noble Lords appear to think that such directors are of little consequence and that some of them would probably not be capable of doing their work. Other noble Lords expressed considerable support for the whole concept provided that the directors were there voluntarily. It seems that some noble Lords, particularly those who are leaders of powerful enterprises, can be said to be guilty of talking with forked tongues. When there are developments in industry involving the ordinary people of this country or their trade unions there has to be legislation— there is no question of it being voluntary. If, however, the interests of boards of directors are affected, it seems that legislation is unnecessary and the voluntary way is much better.

I have nothing more to offer your Lordships, especially after the excellent support that I was privileged to have from the noble and learned Lord, Lord Wilberforce. I hope that noble Lords, after expressing their views this evening, if necessary in the Lobbies, will re-read what they have said in the debate that has taken place and consider its relevance to the contents of the Bill as distinct from the fears that have been put about at the behest of the CBI and those who are prominent in its counsels.

I intend to honour my own promise to Sir Brandon Rhys Williams. I shall do my very best to continue to press the virtues of the Bill so far as I am capable, bearing in mind the very necessary amendment which I have already admitted may have to be made.

I therefore urge your Lordships to give the Bill a Second Reading and enable it to have further consideration, rejecting the amendment of the noble Lord, Lord Mottistone, which I think is entirely inappropriate on this occasion.

8.40 p.m.

Lord Mottistone

My Lords, I always enjoy the fierceness with which the noble Lord, Lord Bruce, seeks to convince his opponents. Somehow I feel that fierceness is not the best way to impress people.

I should like to thank all noble Lords who have taken part in the debate, including those who have been opposed to my amendment. I have two points to make. The noble Earl, Lord Halsbury, asked me whether I represented the heavyweights or industry. I have to tell him that I am a non-executive director of two very small companies which are far below the effects of this Bill. To that extent I represent industry. However, as we all do when we speak in this House, I am representing myself. I should like to think that my noble friends and the noble Lords opposite have also spoken for themselves.

I was intrigued by the arguments of the noble and learned Lord, Lord Wilberforce, because it struck me—and I hope that he will not take this amiss—that unlike most of the other people involved, he had not had practical experience of trying to run a big company. That came through because when one has that experience—and I have been an administrative director in a big company; I have never been a board director—it gives one a different perception.

I was also interested in the arguments of the noble Lord, Lord Williams of Elvel, who rubbished my warning about two-tier boardism and then proceeded to talk about employee-directors, which comes to the same thing. I rather thought that his rubbishing was not to be taken too seriously.

That is quite enough speech. I ask the House to agree to my amendment. I commend it to the House.

8.42 p.m.

On Question, Whether the said amendment shall be agreed to?

Their Lordships divided: Contents, 43; Not-Contents, 22.

Ampthill, L. Craigavon, V.
Bathurst, E. Craigmyle, L.
Bellwin, L. Cross, V.
Benson, L. Cullen of Ashbourne, L.
Brougham and Vaux, L. Dilhorne, V.
Bruce-Gardyne, L. Forte, L.
Cayzer, L. Gowrie, E.
Colville of Culross, V. Grantchester, L.
Colwyn, L. Hanson, L.
Cowley, E. Harris of High Cross, L.
Havers, L. Mottistone, L. [Teller.]
Hylton-Foster, B. Remnant, L.
King of Wartnaby, L. Rippon of Hexham, L.
Kinnoull, E. St. John of Bletso, L.
Lauderdale, E. Seebohm, L.
Liverpool, E. Selkirk, E.
Lucas of Chilworth, L. [Teller.] Sharples, B.
Stevens of Ludgate, L.
McAlpine of West Green, L. Stockton, E.
Marshall of Leeds, L. Taylor of Hadfield, L.
Merrivale, L. Weinstock, L.
Milne, L. Wyatt of Weeford, L.
Blease, L. Nicol, B.
Bruce of Donington, L. Parry, L. [Teller.]
Dean of Beswick, L. Prys-Davies, L.
Elwyn-Jones, L. Rea, L.
Ennals, L. Sefton of Garston, L.
Falkland, V. Tordoff. L.
Graham of Edmonton, L. Underhill, L.
Halsbury, E. [Teller.] Wilberforce, L.
Hylton, L. Williams of Elvel, L.
McNair, L. Wilson of Langside, L.
Morton of Shuna, L. Winstanley, L.

Resolved in the affirmative, and amendment agreed to accordingly.