Performance of Companies and Government Departments (Reporting) Bill

– in the House of Commons at 1:44 pm on 30th January 2004.

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Order for Second Reading read.

Photo of Mr Andy King Mr Andy King Labour, Rugby and Kenilworth 1:52 pm, 30th January 2004

I beg to move, That the Bill be now read a Second time.

In recent years the growing size, influence and power of large corporations has led many people to realise that they can have serious effects on the environment and communities. Many leading companies have recognised that and have run environmental and community schemes. On the other hand, the public have also realised it, often because of negative impacts on them and their communities. In fact, one could say that the agenda has been driven by a mix of disaster and inspiration. Companies such as Nestlé and Cadbury have faced great criticism of their policies and actions. In my constituency, local people have been extremely concerned by RMC's desire to burn tyres as an alternative fuel. The company insists on continuing with that plan despite the enormous concerns about health issues raised by the people of Rugby and Kenilworth. Companies that have implemented positive schemes have fostered a growing realisation that they can be a force for good. For example, the Co-operative bank continues to thrive and is widely admired for its ethical screening of investments.

Photo of Mr Brian White Mr Brian White Labour, North East Milton Keynes

Is not one of the problems that the media do not pick up on such good stories? They are happy to report the bad stories, but they should concentrate on good stories because they would promote what is happening in our communities.

Photo of Mr Andy King Mr Andy King Labour, Rugby and Kenilworth

I thank my hon. Friend for his welcome intervention and agree wholeheartedly with him.

Companies have effects that reach further than their shareholders. I believe that it is the role of Parliament to set laws that encourage and allow companies to appreciate fully the repercussions of their actions. There is an important point to make here. When failures in company law have affected the richest and most powerful in society, we have always acted. Post-Enron and post-BCCI, there was a clamour for rules and regulations to protect investors who lost out. I applaud such regulations and believe that they represent a correct use of the powers of Parliament, but we must act with equal determination on behalf of those who are less well off.

That is recognised by the many organisations that back the Bill—Amnesty International, Christian Aid, Friends of the Earth, Save the Children, and even the women's institute, to name just a few. Support is growing by the day. Major unions have come on board, including, I am pleased to say, my own union, Unison, in addition to the Transport and General Workers Union and Amicus. I was delighted to receive a letter today from Brendan Barber of the TUC, who wished the Bill well. More development agencies have added their support, such as CAFOD and the World Development Movement. The need for the debate is recognised by business, too. Traidcraft, B & Q and the Co-op bank have all joined in calls for the Bill to go to Committee so that the matters can be debated further.

It is against this background that I speak to the Bill. It would require large companies to report every year on their impacts on the environment and on the communities in which they operate. It would also place a duty on directors to minimise such impacts while continuing to ensure the success of the company. Because there has not been an adequate response from companies to the voluntary approach, I believe the time has come for that to become mandatory.

In October 2000 in his speech to the CBI, the Prime Minister challenged the top 350 companies to publish such reports by the end of 2001. Only about a quarter of those companies met his challenge. Although more companies have done so since, about half the companies still do not report on their social and environmental impacts.

Photo of Eric Forth Eric Forth Conservative, Bromley and Chislehurst

Will the hon. Gentleman allow me to intervene?

Photo of Eric Forth Eric Forth Conservative, Bromley and Chislehurst

I am grateful to the hon. Gentleman, and I apologise for not being present for the start of his remarks. I have searched in vain for references in his Bill to Ministers. Although they appear in the title, they are not in the Bill. Why is he letting the Government off the hook while banging on about companies?

Photo of Mr Andy King Mr Andy King Labour, Rugby and Kenilworth

I am glad the right hon. Gentleman spotted that minor omission. I have decided to make the Bill more modest—

Photo of Mr Andy King Mr Andy King Labour, Rugby and Kenilworth

—in order to make progress. However, I agree with the right hon. Gentleman as regards the principle of the Bill. That explains the reference to the Government in the title.

It is not fair to anyone if reporting is not standardised. Many of the companies that produce reports do not provide a full picture of their impacts. Many of the reports are glossy and PR-led, but do not provide information that enables investors to compare the performance of different companies or to track the performance of a single company year on year. We need mandatory reporting and cannot rely on a voluntary scheme—too many will opt out. Mandatory reports will prevent companies with high brand recognition from being undercut by companies less exposed to public attention. Requiring all companies to report will level the playing field.

The first requirement of my Bill in clause 1 is for the annual publication of an operating and financial review, or OFR, to include reports on a company's social, environmental and economic impacts and performance. Clause 1(3) defines the objective of the OFR as allowing an "informed assessment" of the company's operations, financial position, future plans and its impact on the environment and on the communities in which it operates. Clauses 2 and 3 set out the matters that must be included in the OFR, and the matters that need to be included only if they are necessary to allow an "informed assessment".

Clause 4 sets out the process for signing off the review. Clauses 5, 6 and 7 define which companies are "major" and therefore must publish an OFR. I understand that the conditions would capture about 1,000 of the largest companies, although clause 5(7) and (8) would allow Ministers, following a review, to include more companies as reporting methods develop.

The Bill would amend the basic duties on company directors by adding to the duty to return maximum profit to the shareholders further duties to consider social and environmental impacts. Because maximising return to shareholders is legally required of company directors, profit is the ultimate measure of all corporate decisions. A sole duty to profit enables companies to put profit before community well-being, worker safety, public health and environmental preservation. The Bill would change that.

Clause 8 sets out the key duty that directors must act in accordance with the company's constitution. Clause 9 requires a director to promote the success of the company and, in subsection (1)(b), requires that he consider all material factors. Material factors are further defined in the clause to include, among other matters, impacts on communities and the environment. The clause also requires directors to reduce as far as possible damaging impacts on the environment and communities. Such impacts were highlighted in a recent report by Christian Aid, "Behind the mask: The real face of corporate social responsibility". What some of the largest companies are doing in the UK and across the world is appalling and must end.

Clause 10 sets restrictions to prevent directors delegating their duties to others, except in certain well-defined circumstances. Clause 11 determines the standards of care and diligence that will be expected of directors.

I acknowledge that much of the work on those clauses was done not by me, but by the Government. As much as 95 per cent. of the Bill is taken from the White Paper "Modernising Company Law", which included a set of draft clauses. I have altered those proposals—modestly—to increase the extent to which environmental and social matters are included in the reports. I have also allowed the OFR rules to extend to smaller companies in time.

However strongly I recommend the changes to the Minister, even more important is that there is a change in gear in implementing the proposals. It is three years since the Prime Minister issued his challenge, yet it has largely not been met. The company law review, having begun in March 1998, is now almost into its sixth year, yet we still have no requirement for reporting. In 1994, the Labour party published its environment policy, "In Trust for Tomorrow", which promised

"a requirement on larger companies to report on environmental performance and strategy, helping to optimise resource use, reduce pollution and disseminate best practice."

Ten years on, that commitment is just as valid.

An advance in this field is vital to every Member of Parliament and everyone across the country. The proposals in the Bill will benefit us all. I hope that the Minister will recognise the pressure for change and redouble the efforts of his Department and others to get the measures introduced and operating as soon as possible. I commend the Bill to the House.

Photo of Angela Watkinson Angela Watkinson Opposition Whip (Commons) 2:02 pm, 30th January 2004

There is no doubt that corporate social responsibility is highly desirable, and the Opposition support fully the idea that the business activities of Government Departments and of UK companies both at home and in the underdeveloped world should have a positive effect on the economies and the environments in which they work. More important, their impact should not be negative.

The question is whether legislation is the best way to achieve those ends. The Bill is well intentioned, but it might prove to be counter-productive. Business is already overburdened with red tape, and there is a danger that yet more red tape and regulation would discourage those companies that feel that they are already doing a good job by helping to create wealth and employment. Andy King referred to companies with a good reputation. Legislation could have precisely the opposite effect to the one intended by eroding existing good will. On the principle that one volunteer is worth 10 pressed men, encouragement is likely to bear more fruit than compulsion.

The main provisions of the Bill are to require large companies—those employing more than 500 people and with a turnover in excess of £50 million a year—to report on their impacts on the environment and on society, and to expand the duties of directors to incorporate a duty of care for the environment.

I draw the attention of the House to clause 9, which details the promotion of company's objectives. Subsection (1) states:

"A director of a company must in any given case . . .

(c) take all reasonable steps to minimise the impact of the company's impact on the communities it affects and on the environment."

That seems to presume that the impact of the company's activities will be negative— if they are to be minimised, one must assume that they are negative—and it does not allow for the possibility that the company might have a positive impact on the environment and community in which it operates. I hope that some redrafting will be considered if the Bill progresses to Committee stage.

The proposal for company reports, exactly what they should report on, to whom and how that information should made available, what measures would be used to assess their findings, against what standards those findings would be judged, and in particular what sanctions might flow from such reports if they were deemed to be unsatisfactory or to fall short of those agreed standards, are all important details that are absent from the Bill. It is expressed in general terms and open to wide interpretation, and those are some of the many matters that could be thrashed out in Committee. That is why the Opposition would be happy for the Bill to proceed to Committee stage if that is the will of the House.

Similarly, the proposal to extend the duties of company directors to include a duty of care for the environment and the community requires clarification as to exactly what those duties are. The term "duty of care" could be interpreted in many ways, but it needs to be specific if sanctions are to apply following failure to fulfil those duties.

Clause 1(5) states:

"The directors must comply with any rules about the manner in which the operating and financial review is to be prepared."

That is clarified further in subsection (9), which states:

"Rules under this section may be made by regulations made by the Secretary of State."

That is an extremely wide power, and, again, I hope that that will be more clearly defined when it is looked at in more detail.

Various interest groups have contacted me, and, I dare say, every other Member, in support of the Bill and the introduction of mandatory international measures to oblige companies in law to fulfil their corporate social responsibilities. The hon. Gentleman has circulated a list of supporting companies and other bodies, including many retail and other types of companies, which illustrates that there are examples of good practice, and that business per se is not all bad.

Christian Aid has contacted me and it takes rather a pessimistic view of the activities of business and concentrates its remarks on bad practice rather than good. The other side of that coin is that to burden all businesses because of the bad practice of some could be counter-productive when some are operating very responsibly.The corporate responsibility coalition, which incorporates Friends of the Earth, the WWF, Unison, Amnesty International and many other well-known organisations, also takes that view.

But there is a third-party view from an organisation that champions corporate social responsibility in the business sector, Business in the Community, which has hit back at claims that corporate social responsibility has turned into what others might call a dangerous public relations exercise and a vehicle for opposing regulation. Mallen Baker, the development director of Business in the Community, has said:

"Corporate social responsibility is about best practice. Responsibility is inherently voluntary, so it has to be about the choices that a company makes within its set business environment. Simply complying with the law is not CSR."

The implication is that some companies would set themselves higher standards than the minimum for which the Bill might aim—although, of course, such aims remain to be clarified.

It is clear that there is a great deal to be debated, but I am aware of the shortness of time and that other hon. Members might want to speak. I shall therefore curtail what was to be a very long speech in order to allow others to make their remarks. If it is the will of the House, we shall be happy to allow the Bill to go into Committee.

Photo of Mike O'Brien Mike O'Brien Minister of State (Trade), Department of Trade and Industry, Minister of State (Trade), Foreign & Commonwealth Office 2:10 pm, 30th January 2004

I begin by expressing my thanks to my hon. Friend Andy King for entering into substantial discussions with my right hon. Friend the Minister for Industry and the Regions, who has responsibility for these matters, on developing the key proposals of this private Member's Bill.

As that consultation will have confirmed, the Government fully appreciate and support the general objectives that lie behind my hon. Friend's Bill. I believe that we all want business to make a full, positive and constructive contribution to Britain's society. Business is not just about jobs, wealth creation and delivering the goods and services that we expect—important though they all are; it is also critical to achieving our environmental and social objectives.

This Government set up the first major review of company law for more than a generation. I pay tribute to the members of the independent steering group, to those who were involved in the CORE coalition and to the hundreds of people who took part in the work of examining company law. We are working hard to bring forward a Bill, building on the review's recommendations. In the interim, the Companies (Audit, Investigations and Community Enterprise) Bill is in the other place. That is as tightly focused as its title suggests. It is designed chiefly to implement the recommendations of the post-Enron reviews, to allow for the creation of community interest companies and to improve the company investigation regime.

The first seven clauses of my hon. Friend's Bill deal with the operating and financial review—the OFR. The company law review rightly criticised the fact that company accounting and reporting remain essentially backward-looking and based on financial indicators. There are few statutory requirements to report on the main qualitative factors that underlie past and especially future performance, such as business strategies, a skilled work force or successful brands. The review recommended that companies of significant economic size should be required to publish an OFR as part of their annual report and accounts.

Photo of Eric Forth Eric Forth Conservative, Bromley and Chislehurst

I would be very interested in the Minister's and the Government's view on how practical it would be under clause 3 to expect any company to measure the impact of its policies on the environment. I would be even more interested in the Minister's definition of social and community issues in the context of company impacts. What on earth has the business of the law to do with a company's reputation? Is this not just nonsense?

Photo of Mike O'Brien Mike O'Brien Minister of State (Trade), Department of Trade and Industry, Minister of State (Trade), Foreign & Commonwealth Office

I am pleased that the right hon. Gentleman is interested in the Government's view. I assure him that I will explain at some length the Government's view on each of those factors.

As my hon. Friend said, in July 2002 the Government published a White Paper, "Modernising Company Law", which contained some illustrative clauses on the OFR that were designed for discussion. The draft clauses form the basis of clauses 1 to 7 of the Bill. The initial clauses that we drafted were essentially to provide the opportunity for the public, various company directors, non-governmental organisations and others to give feedback on what they thought such a Bill might look like. We published the White Paper as part of our overall reform of company law. However, we have since decided to take forward the OFR in regulations, not in primary legislation. On 10 July last year, my right hon. Friend the Minister for Industry and the Regions announced, in a written statement on company law, that we would publish draft regulations for consultation in due course.

We have now had the benefit of considering more than 250 responses to the White Paper regarding the OFR. They are mostly supportive of the principle of a statutory OFR, although a wide range of views is expressed on the detail. We have continued to develop the policy and to draft detailed legislation on matters such as the role of auditors and enforcement, which are somewhat sketchy in the White Paper. One of the objectives of the revised proposal was to ensure that we do not impose unnecessary burdens on companies by requiring them to comply separately with the requirements of the OFR and the EU modernisation directive, which was adopted last year. Understandably, my hon. Friend's Bill takes no account of that directive, part of which requires additional reporting by companies, including on information relating to environmental and employee matters. As that comes into force at the beginning of 2005, it makes sense to deal with it and the OFR in a single, coherent piece of legislation to avoid companies having to make two separate but overlapping reports, which would be duplicative and bureaucratic. We want to place this on a much more rational and sensible basis.

Photo of Mike O'Brien Mike O'Brien Minister of State (Trade), Department of Trade and Industry, Minister of State (Trade), Foreign & Commonwealth Office

I just want to make the following point, then I will give way with pleasure.

I ask my hon. Friend and other supporters of the Bill to be patient for a little longer. The Government will soon publish revised proposals on the OFR, which will be a significant improvement on the illustrative clauses that were published in the White Paper and are largely reproduced in the Bill. We will publish with the draft regulations a document setting out our policies and the reasons for them.

Photo of Edward Leigh Edward Leigh Chair, Public Accounts Committee, Chair, Public Accounts Committee

Have the Government made an assessment of the Bill's regulatory impact on companies? Will such an assessment be made available to the House?

Photo of Mike O'Brien Mike O'Brien Minister of State (Trade), Department of Trade and Industry, Minister of State (Trade), Foreign & Commonwealth Office

Not at this stage. The detailed proposals in the Bill were published only recently and, obviously, have only just reached Second Reading. If they were likely to become law, we would make a full regulatory impact assessment—not only of the Bill's effects on companies and their employees, but of all the environmental and social consequences that would flow from it. In developing this strategy, we want to publish some further proposals and to gather some ideas about potential effects from the various organisations involved.

Photo of Robert Smith Robert Smith Opposition Deputy Chief Whip (Commons)

The Minister suggested that hon. Members should be patient. Witnesses who appeared before the Select Committee on Trade and Industry were attracted by the White Paper's vision of company law finally being brought together in one overarching Bill and the burden on smaller businesses being reduced by the nature of its structure. The Minister says that the Government are working hard on the Bill. Can he give the House some idea of when it will be produced and put before us, so that we can see that the promises in the White Paper are being delivered?

Photo of Mike O'Brien Mike O'Brien Minister of State (Trade), Department of Trade and Industry, Minister of State (Trade), Foreign & Commonwealth Office

To some extent, that will depend on the way in which the continuing work results in outside organisations expressing concerns that we have to take into account. I cannot therefore give a clear timetable. We are working reasonably quickly, but when we consider introducing complex legislation that will have a significant impact on many companies we are required to take full account of the views of a range of companies, the trade unions and various non-governmental organisations that have contributed so far. We want to ensure that they get the opportunity for a further say on, for example, any Government proposals on regulation, the Bill and the formal statutory legislation that we want to introduce in due course.

Photo of Andrew Dismore Andrew Dismore Labour, Hendon

As my hon. Friend knows, I am a sponsor of the Bill and I feel strongly about the issues that it covers. I want to raise a similar point to that made by Sir Robert Smith. My hon. Friend mentioned that the Government would produce draft regulations soon. How soon is that? Does he anticipate a further round of consultation on the draft regulations or will they be laid before Parliament and processed relatively quickly?

Photo of Mike O'Brien Mike O'Brien Minister of State (Trade), Department of Trade and Industry, Minister of State (Trade), Foreign & Commonwealth Office

On the timetable for producing and consulting on the draft regulations, it would probably be best if I got some details from my right hon. Friend the Minister for Industry and the Regions. I shall write to my hon. Friend Mr. Dismore, the Liberal Democrats and the Opposition so that they have some idea of when we shall introduce the regulations. We have the Bill and the regulations, so many issues still require consultation.

My hon. Friend the Member for Rugby and Kenilworth kindly noted that the provisions on directors' duties relate closely to the clauses in the review. We are grateful to those in the CORE coalition, who commented on the drafts. That has led us to conclude that several essentially technical improvements should be made. We shall consult on them in due course. The clauses also help to answer one of the most important questions in company law: in whose interests a company should be run.

The company law review considered the matter in detail and consulted on it on several occasions. It recognised, as I do, that many argue that a company should be required to serve a wider range of interests beyond simply those of the shareholders. Such a pluralist approach inevitably involves balancing potentially conflicting interests. Mr. Forth mentioned that and the way in which the various balancing interests would need to be resolved by a company director answering the question that the measure proposes. We need more detailed examination of how a director could consider all those issues. The right hon. Gentleman appears to be itching to jump out of his seat. I should hate to disappoint him by allowing him to do that. However, it might be helpful if I gave him an example of the approach and perhaps he could intervene subsequently.

Let us suppose that a group of directors is considering which of two factories to expand. I hope that we all agree that they should take a wide range of factors into account. They could include the availability of a work force for each site, which site would best meet the customers' needs, the impact on the two different communities and on the environment and so on. Let us suppose that the group's evaluation shows that expanding on site A would produce 100 additional jobs in an area of high unemployment, when there is essentially full employment at site B. However, let us further suppose that the impact on suppliers of expanding on site A is slightly greater than that of expanding on site B. How do the directors decide whether creating 100 additional jobs in an area of high unemployment is worth the marginally greater impact on their suppliers? They would need some form of common measure to enable them to strike a balance, as the right hon. Member for Bromley and Chislehurst suggested earlier. I should like to make it clear that the Government reject any suggestion that this should involve the view only of the directors looking after the short-term interests of shareholders' profits. There needs to be a wider test. We need a more practical and inclusive solution, involving what the company law review described as enlightened shareholder value. And on the issue of enlightened shareholder values, I give way to the right hon. Member for Bromley and Chislehurst.

Photo of Eric Forth Eric Forth Conservative, Bromley and Chislehurst

The Minister's analysis is very helpful to the House, not only today but when we consider the measures to be introduced in the future. Will he comment on clause 9, which puzzles me and, I suspect, might puzzle the Minister as well? Clause 9(1)(a) states that the director of a company must

"act . . . in good faith" in a way that

"would be most likely to promote the success of the company for the benefit of its members as a whole".

I wonder whether the phrase

"of its members as a whole" has a particular legal meaning. Does it, in other words, mean the shareholders? Or does the term "members" encompass shareholders, employees, directors and anyone else we can think of? Language such as that strikes me as somewhat problematic in the drafting, if not in the philosophy behind the Bill.

Photo of Mike O'Brien Mike O'Brien Minister of State (Trade), Department of Trade and Industry, Minister of State (Trade), Foreign & Commonwealth Office

The right hon. Gentleman makes a reasonable point. We must be clear, when we are placing a duty on the directors of a company, precisely to whom they owe that duty. Clarity in the law is essential, because if directors have a duty in law that is only vaguely set out, they could well find themselves being challenged in court over the precise consultations and circumstances that they took into account when making a particular decision. We might think that that is very unlikely, but if a large number of jobs were at stake in a community, it would not be. In such circumstances, the directors of a company could well find that the trade unions would, in many ways justifiably, see an opportunity to protect the interests of their members or of the wider community.

It is therefore important that the wording of a Bill should be clear. Normally, the members of a company are regarded as the shareholders. That is the position in company law. The way in which the legislation is presumably set out here would therefore involve that definition, if it is using the normal description used by company lawyers. I cannot, however, see a separate definition of that term in the Bill. If I remember my company law well—it is now some years since I practised it—it is set out in the Companies Act 1948, but it could have been regularly superseded since then.

We need a view of the responsibilities of directors that shows that they have regard for enlightened shareholder value. That means that the basic goal for a director is to do what he judges to be in the best collective interest of the shareholders. Crucially, in deciding this, he must take into account all the material factors that he can practically identify in the particular circumstances of that decision. What are those material factors? Clearly, a director must take account of the relevant short and long-term consequences of any decision, but there is much more involved. A director must also take account of all the other factors that a person of care and skill would regard as relevant. Depending on the decision, this could, for example, include relationships with trade unions, employees, customers and suppliers, the company's reputation, and its social and environmental impact on the community and the working environment. That is presumably what clause 9(1)(a) and (b) are about.

My hon. Friend referred in his speech to the changes that he had made to our proposals. At first sight, the addition of subsection (1)(c) to clause 9 might appear a mere technicality. As I have just said, I agree with my hon. Friend that, wherever it is relevant, directors should take into account the impact of the company's operations on the communities that it affects and on the environment. Indeed, the House will see that that is set out in subsection (3)(b). Repeating it in subsection (1)(c), however, makes a fundamental change, making the duties pluralist. As I have explained, that is not the practical way forward. It may be only two dozen words, and they may appear a little technical—

Photo of Michael Lord Michael Lord Deputy Speaker (Second Deputy Chairman of Ways and Means)

Order.

Debate to be resumed on Friday 26 March.