HL Deb 30 July 2002 vol 638 cc809-11

11.5 a.m.

Lord Ezra asked Her Majesty's Government:

Whether they intend to provide a statutory definition of the role of non-executive company directors.

The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville)

My Lords, the Government published their White Paper on company law on 16th July. The White Paper proposes a statutory statement of directors' duties. The Government have also asked Derek Higgs to conduct a review of the role and effectiveness of non-executive directors.

Lord Ezra

My Lords, I thank the noble Lord for that reply, and I am aware of the review being carried out. Meanwhile, I find it a bit surprising—I ask the noble Lord whether it was deliberate—that no reference was made to non-executive directors in the document to which he referred, the White Paper on company law. I should have thought that in the light of the present uncertainty about corporate affairs such reference would have been necessary.

Furthermore, in view of the importance attached to the independence of non-executive directors, is the Minister aware that there is some ambiguity about this in the Combined Code which lays down the rules for corporate behaviour in that it refers to the appointment of, non-executive directors (including independent non-executive directors)"? Is there a new class of non-independent non-executive directors?

Lord Sainsbury of Turville

My Lords, the White Paper on company law to which the noble Lord refers accepted the conclusions of the company law review that there should be a statutory statement of directors' duties and that all directors should be subject to the same set of general duties regardless of any particular duties they may have under service agreements as employees. As the noble Lord said, the draft statement does not define the role or the independence of non-executive directors. However, considerable work is going on in the form of the interim report of the Co-ordinating Group on Audit and Accounting Issues. The report has a bearing on the question of the role of non-executive directors and contains two recommendations clearly to that effect. The question of the role of the non-executive directors will clearly be considered in the light of that. The issue of definition also is important. It is likely that the matter of non-executive directors' independence will require greater definition than the term non-executive director.

Lord Barnett

My Lords, will my noble friend clarify whether the Government are truly considering legislation in this regard? In view of the role of non-executive directors in current circumstances, and especially because they must man the audit committee of most major companies—I am sure that he recognises that role—has he in mind moving towards European-style supervisory boards of non-executive directors?

Lord Sainsbury of Turville

My Lords, as I hope I made clear, related work is under way. The interim report of the Co-ordinating Group on Audit and Accounting Issues recommended an examination of the improved combined code guidance for audit committees on their responsibilities and how to meet them. That is being taken forward by the Financial Reporting Council. The report also recommends that the Government consider underpinning in company law the role and responsibility of audit committees. Those two steps are bound to relate to the question. However, I know of no proposals on supervisory boards.

Lord Marlesford

My Lords, does the Minister believe that a primary role and responsibility of a non-executive director is to become aware of the potential insolvency of the company just as soon as any executive director becomes aware of it, and to see that that information is immediately transmitted to the shareholders and the investing community in general?

Lord Sainsbury of Turville

My Lords, in this, as in so many other respects, non-executive directors' responsibilities are similar to those of all other directors. Indeed, that is one of the arguments being put forward in relation to whether we need a particular definition of a non-executive. However, I should have thought that, in this and many other matters, the role of the non-executive is the same as that of other directors.

Lord Borrie

My Lords, I declare an interest as a non-executive director. Does my noble friend agree that it would be better if the law did not perpetuate the fiction that a non-executive director has as much knowledge, control and influence over the affairs of a company as an executive director? Would it not be better if those roles were set out separately and clearly so that we all understand where we are?

Lord Sainsbury of Turville

My Lords, it is exactly that kind of question that is being looked at at the moment. Some believe that all directors should be the same. However, the noble Lord makes the fair point that in some aspects directors are not the same. Those are the kind of issues which need to be considered.

Lord Hooson

My Lords, is not one of the problems that so many non-executive directors are executive directors of other companies? As regards remuneration committees, do they not have a vested interest in keeping board salaries at as high a level as possible? How does the Minister propose to deal with that problem?

Lord Sainsbury of Turville

My Lords, it is difficult to find someone who does not have a view who is at the same time expert enough to act as a non-executive director. I believe that the right way to approach the matter is to strengthen the role of shareholders, as we are doing through regulations, so that there is greater transparency rather than to believe that one can get a competent non-executive director who has no links with the business world.