Performance of Companies and Government Departments (Reporting) Bill

Part of the debate – in the House of Commons at 2:10 pm on 30th January 2004.

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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

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is now some years since I practised it—it is set out in the Companies Act 1948, but it could have been regularly superseded since then.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—