Financial Regulation (Hansard, 7 March 2002)

§ Lord Watson of Richmond
asked Her Majesty's Government:
Whether, in view of the collapse of Enron and the Allied Irish Bank fraud case, new and additional financial regulations for public companies may be required in the United Kingdom.

§ Lord McIntosh of Haringey
My Lords, both of the cases referred to took place in the United States, where financial regulation and accounting requirements are significantly different from those which apply in the United Kingdom. But it would be unwise to assume that similar problems could not arise here, and right that UK regulators should review their arrangements carefully in the light of these events.
The Secretary of State for Trade and Industry announced on 27th February that the DTI and the Treasury are jointly setting up a group to oversee and co-ordinate the UK response to the accounting and auditing issues raised by Enron in particular. She also announced a review to examine the role and effectiveness of non-executive directors of British companies.

§ Lord Watson of Richmond
My Lords, I am grateful to the Minister for that reply. I am sure he would agree that the role of the non-executive director lies really at the heart of the credibility of corporate governance. The days have sadly long gone by where the presence of a "Lord on the board" was a guarantee of the credibility of that corporate governance. Does the Minister therefore agree that the Government should back the proposals of Professor Myers to formalise regular meetings between institutional investors and non-executive directors without executive directors being present? Secondly, can he assure the House that he will succeed in persuading Sir Peter Davies to head the Government's review of the role of non-executive directors, or find someone of equal status before too long?.

§ Lord McIntosh of Haringey
My Lords, never having been offered the opportunity to be a "Lord on the board", other than on the board of my own company, I do not know whether it is appropriate for me to comment on the noble Lord's first point. As he knows, Professor Myers works very closely with the Government. I am sure that that will continue. We 388 take his views very seriously indeed. As to the chairmanship of the group, I can only say that discussions are proceeding.

§ Lord Hodgson of Astley Abbotts
My Lords, can the Minister give the House an assurance that I here will be no Gadarene rush to further regulation? The new regulatory system in the City is less than three months old and many firms are struggling with the burden of having to implement it. Does the Minister agree that if we produce more regulation we will be in danger of impacting on the competitive position of the City of London at a very critical time in the formation of a European capital market? In asking the question, I declare an interest as the chairman of an investment bank working in the City.

§ Lord McIntosh of Haringey
My Lords, we must be very careful. Those who express great confidence in the integrity of the City of London are faced time and again with shocks which they said could never happen and then do. Barings Bank is one example; and there have been many others. The Barings example is close to the Allied Irish Bank example. So I would be cautious about ruling out further or different regulation as the outcome of the review to which I have just referred.

§ Lord Paul
My Lords, can my noble friend confirm whether it is really possible for non-executive directors to find out about any mistakes during the little time that they spend with the company?.

§ Lord McIntosh of Haringey
My Lords, that is why we are having a review of the role and effectiveness of non-executive directors. In looking at the list of non-executive posts, which a number of people—not necessarily Lords, indeed probably largely not Lords—hold, I agree with my noble friend Lord Paul. I find it difficult to see how they could spend enough time. Surely it is also a question of skill, of experience and of access to the information which is necessary to carry out a non-executive director's job.

§ Lord Taverne
My Lords, in reviewing the role of non-executive directors, will the Government look again at the often quoted doctrine that the responsibilities in law and in fact of all directors on a board are equal when patently they are not? Non-executive directors are in a very different position from executive ones. Indeed, the difference between them could be regarded as the difference between referees and players. To regard them as the same often has most unfortunate consequences.

§ Lord McIntosh of Haringey
My Lords, I would qualify a little of what the noble Lord. Lord Taverne, says. Non-executive directors do have particular roles as members of remuneration committees and audit committees. To that extent, the referee role, as opposed to the player role, is properly recognised. 389 Nevertheless, the noble Lord has a valid point. That is one of the issues which I have no doubt will be debated by the review group.

§ Baroness Miller of Hendon
My Lords, given that auditors are prohibited from being directors of the companies for which they carry out an audit, and vice versa, does the Minister think that auditors should be equally prohibited from being consultants to companies which they are auditing—except of course if the audit is in relation to tax matters, which are relevant? If he thinks that there is any value in that proposition, will the Government consider doing anything about it? He may of course think that there is no value.

§ Lord McIntosh of Haringey
My Lords, no, on the face of it that seems to be a proper and helpful comment. So often these days consultants perform similar roles to those of directors, often without having the same responsibilities, which makes the matter even worse. One matter which shocked me about Enron was the extent to which staff members and partners of the audit firm then went on immediately afterwards to become directors of the company that they had audited. I assume that that is also a matter that we shall be looking at.

§ Lord Razzall
My Lords, can the Minister indicate what the relationship is in timing between the inquiry that he referred to, which I think is welcomed in all parts of the House, and the reform of company law, which is much mooted and to which the Government are committed?.

§ Lord McIntosh of Haringey
Yes, indeed, my Lords, we are committed to that. Last year, we published an enormous volume on the reform of company law. A Bill team is working on company law reform at present. As is well known, I cannot say when that will gain parliamentary time, but there will of course be extensive consultation with at least draft clauses being available before any Bill is presented to Parliament. But other things are going on at the same time. The Financial Services Authority is undertaking a review of listing rules which is expected to take between one-and-a-half and two years. These things take too long.

§ Lord Phillips of Sudbury
My Lords, I speak as a "Lord on three boards". Is not one problem that executive directors choose as non-executive directors people with whom they feel comfortable and whom they sense may not—how shall I put it—rock the boat? Does the Minister agree that far more important than regulation and non-executive directors is the whole ethos within which the City, in particular, carries on its tasks?.

§ Lord McIntosh of Haringey
My Lords, I assume that the noble Lord was not chosen by the executive directors of those companies because he is amenable to their wishes. Knowing him, I am sure that he would 390 not be. The Question raises important issues, for example, the role of institutional shareholders. Should they not have a say in who the non-executive directors are? Those are all matters of great importance. I think that we shall have an opportunity to debate them on a Labour debate in the near future.