Constitution and Functions of Audit Committees

Part of Orders of the Day — COMPANIES BILL [Lords] – in the House of Commons at 4:08 pm on 26 February 1980.

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Photo of Mr Clinton Davis Mr Clinton Davis , Hackney Central 4:08, 26 February 1980

I begin by congratulating my hon. Friend the Member for Sheffield, Heeley (Mr. Hooley) on an excellent speech about which he was far too modest. The draftsmanship of the clause has been extremely competently done and I hope that he will take some comfort from that view. The importance of his tabling the new clause was to direct attention to the important issue of the appointment of non-executive directors and the role of audit committees, although I dare say that if he had not tabled the new clause we would still have debated the issue. We might have relied on the hon. Member for Kensington (Sir B. Rhys Williams) to ensure that.

My hon. Friend approached the matter from an important angle—the protection that might be afforded in the reputation of companies to shareholders and those interested in fair dealing. For that purpose he drew attention to certain City scandals and company investigations, some of which I had a hand in setting up. An interesting feature of the sort of companies that are subjected to that sort of behaviour is that they are rarely, if ever, companies that are involved in making things—in manufacturing. They are companies which are involved in property dealing, speculation or financial manipulation. Such companies are sometimes susceptible to the sort of behaviour that gives rise to the need for investigations to be carried out.

My hon. Friend was absolutely right to point out that recent experience over the course of the last two weeks has shown that everything is not manifestly well in connection with the system based on self-regulation. He said that his purpose was to make self-discipline work in practice.

I also pay tribute to the hon. Member for Kensington, who, over a long period of time, has fought to some extent a one-man campaign to cause Governments to embark upon the process of reform about which, once again, he has spoken so eloquently today. He said that he was gratified that his support in the House seems to have been doubled by the recruitment of my hon. Friend the Member for Heeley. However, that is an injustice to me—I have always been a friend of his on this issue. Therefore, we have trebled our numbers.

The concept of including the question of the appointment of the audit committee on the agenda of every annual general meeting is one that I commend to the Government on the basis that it was commended by the hon. Member for Kensington. Indeed, he founded his other notion on a similar basis which provides for flexibility of a company. It does not make it a statutory requirement that a company must have non-executive directors and an audit committee but it does provide for a company to ensure that it will deal with the matter at the appropriate time.

What the hon. Member for Kensington did was to urge the Government to embark upon a process of consultation on that basis. I support him in that. I hope that we get a response, from whichever Minister replies, similar to that which we announced during the process of our bill in 1978, which was that we would enter into consultation. Indeed, that took place and I will refer to it in a moment.

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I hope that the consultation is more specific this time and does not deal so much with whether it should be a statutory requirement as with whether the concept embraced by the speech of the hon. Gentleman might form a more satisfactory way of proceeding in the course of the next few years.

I agree that non-executive directors need to be provided with some greater weaponry and armour to fulfil their duties of independent scrutiny more effectively than the law provides at present. I will not say anything about the two-tier board at this stage because that will be the subject of separate debate later in these proceedings.

At this point I want to refer to our approach in 1978 following the consultation that we set up, about which I received a letter from the Minister today. That indicates that he is falling behind with all the work that he has to do, because he promised that reply in Committee. I do not blame him too much for the delay. It was helpful to have my attention drawn to the comments and research published in the Bank of England Quarterly Bulletin of December 1979, to which I will also refer in a moment.

In his letter the Minister pointed out to me—this is evident from the replies that he received—that there was a great deal of support for the concept of non-executive directors among the many who were canvassed. It was felt that it would be conducive to the best interests of a company to have non-executive directors, but there was considerable opposition to the idea of making them a mandatory requirement.

I dare say that if company directors in the United States and Canada had been similarly canvassed the answers would have been predictable. I am sure that they, too, would not want a mandatory system of audit committees imposed upon them. But the audit committees came about as a result of pressure from the Securities Exchange Commission; and the New York Stock Exchange, as has been said, decided to make them a listing requirement.

I believe that very few people in the United States today would want to put the clock back. Throughout North America the system is proving to be a distinct success. It has not been an unqualified success, because it has its blemishes and there are anomalies attached to it. But overall it has been a distinct success.

If we could have more rapid knowledge about the practice that goes on where companies have embarked upon this idea, I believe that people would more readily entertain it. However, there it is. I do not think that the Minister favours the idea of a mandatory requirement, and no doubt he will tell us that today. Many of those who were canvassed pay lip service to the benefits of these two concepts but do not want to see too much progress.

When I made the statement about consultation I remember saying that if the voluntary method failed we would have to look carefully at the need to impose a legislative requirement, and I see no cause to dissent from that proposition today.

In Committee the Minister also supported the concept. He had something very interesting to say about it. He said: I believe that this is a subject to which we should return on the Floor of the House so that the whole House should have an opportunity to say something about it". As we all know, this very full House is avid in its interest in the subject and no doubt we shall have hundreds of speeches on the topic later.

The Minister also said: The difference between my hon. Friend and myself is simply the question whether we impose these things by statute at this time."[Official Report, Standing Committee A, 6 November 1979; c. 35.] I emphasise the words "at this time". So the Minister does not seem to be ruling out the possibility of legislation if progress cannot be made swiftly enough. But still he believes in the principle of voluntarism when it comes to this concept.

The Minister has said that more and more companies now recognise that non-executive directors are important and are appointing them, and we must look at the scale of advance that has been made. I hope the Minister will—not necessarily today—seize the opportunity to publish the information about the progress that has been made so that not only I but others receive it. Is there sufficient evidence to support the conclusion that the voluntary approach will succeed over the next five years or so? What time scale do the Government think is appropriate to test this matter out properly? If progress within such a period is inadequate, should we not review, once again, the acceptance of the voluntary approach?

My hon. Friend the Member for Swansea, East (Mr. Anderson) pointed out that the Government were placing entire reliance on voluntarism in this sphere of economic activity but yet denied that when it came to the trade union sector. I think that that nonplussed the Secretary of State. He was clearly stumped for an answer at the time and almost conceded that.

What I commend to the Minister is that we should, at the very least, undertake a more coherent study of this matter. The prime purpose of having non-executive directors and audit committees, as I see it, is to encourage companies to be more responsive to change, to encourage greater efficiency and to keep them more in touch with what is happening in the world outside, and also to act as a balance to the overweening influence of members of the board. That is a subject to which we shall return later and something that was well illustrated by the recent Newman Industries case.

All this, in every respect, is designed to assist and protect shareholders and at the same time those who are engaged as members of the work force in the progress that a company should be making. For the same reasons, I believe that it can act as a barrier against fraud and abuse.

The paper submitted to me by the Minister and which was published by the Bank of England is very interesting. It certainly shows that there has been some progress since the Bullock committee conducted a survey into the application of the idea of non-executive directors and audit committees. An interesting fact was reported in the survey—namely: About one-quarter of the companies in The Times 1,000 are controlled by foreign shareholders. That is about one-quarter of our top companies. The survey states: This presents certain difficulties both in compiling and in interpreting the figures of non-executive directorships. It is much more than that. It presents all sorts of problems for the application of other aspects of company law. The survey adds: The mere presence of non-executive directors on company boards does not, of course, ensure that they will be active in their role of independent critical advisers, nor that companies will use them in this way. That is one of the difficulties to which I alluded in my remarks in Committee. There are some matters which the proponents of non-executive directors and audit committees must deal with adequately.

It would be fatally counter-productive if non-executive directors were chosen, or if their choice were influenced, by a powerful chairman or other board members who wanted cronies to help to camouflage and thus institutionalise existing inefficiency, malpractice, misfeasance and perhaps deceit and fraud.

A compliant non-executive director manipulated by an authoritarian chairman, or by others on the board wielding such influence, would contribute to the death of this important idea. The selection of non-executive directors and audit committees should be independent of the sort of influences to which I have referred.

The idea of non-executive directors must not be seen as a substitute for the concept of industrial democracy. I think that the hon. Member for Kensington recognises that. It is to be viewed, however, as a spearhead towards it. Essentially non-executive directors must be active, critical and independent if they are to be of value to the company and the concept, otherwise they will become discredited.

The Stock Exchange has suggested that it might be possible to recommend that the concept be included as a listing requirement, a suggestion which did not receive wild acclamation. It is one of the ideas coming out of the Stock Exchange which I find interesting and progressive I hope that the Stock Exchange will not abandon it.

In the Bank of England Quarterly Bulletin, to which I have referred, it is suggested that the survey which the Bullock committee carried out, and which was followed, should be undertaken at intervals to check developments. That is something that the Government might well undertake. As the hon. Member for Kensington said, it is a concept with which the Bank should be intimately concerned and connected. I hope that it will feel it appropriate to carry out a survey at intervals to check developments. That is incumbent upon it if it is not merely to pay lip service to an idea which the hon. Gentleman has caused to flourish and which I hope will be brought to fruition in the not too distant future.