Enterprise Bill

– in the House of Lords at 3:07 pm on 15th October 2002.

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Report received.

Clause 1 [The Office of Fair Trading]:

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative 3:09 pm, 15th October 2002

moved Amendment No. 1:

Page 1, line 5, after "corporate" insert "with both a chairman and a chief executive"

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

My Lords, we return to a subject which we have debated on many occasions; namely, good corporate governance. I want to speak to a number of amendments which are set out on the Marshalled List. Amendment No. 1, which is at page 1, line 5 of the Enterprise Bill, inserts after the word "corporate" the words "with both a chairman and a chief executive". Clause 1(1) will therefore read as follows:

"There shall be a body corporate with both a chairman and a chief executive to be known as the Office of Fair Trading (in this Act referred to as 'the OFT')".

Amendment No. 2 seeks to insert at the end of Clause 1 a new subsection (4) which states:

"In managing its affairs the OFT must have regard to the generally accepted principles of good corporate governance".

The noble Lord, Lord McIntosh of Haringey, may recall that he moved a similar amendment to the Financial Services and Markets Bill which was incorporated into that legislation.

Amendment No. 3 would insert a new subsection (5) to the effect that,

"The appointments of the chairman and the chief executive shall not take effect until they are confirmed by the House of Commons Treasury Select Committee following a public hearing".

That is another issue which we debated in relation to the Financial Services and Markets Bill. That debate was an opportunity for the Minister to outline the way in which the appointments were to be made—to which I shall return in a moment. Although the issue of whether the House of Commons Treasury Select Committee will confirm the appointments is of course a matter for the other place, as the issue has arisen previously, I make no apologies for mentioning it again.

Amendments Nos. 4 and 5 would insert the words "a chief executive" and "and the chief executive" on page 195, lines 5 and 7. I shall not go in detail into the remaining amendments in this group. Suffice it to say that they insert the words "the chief executive" after the word "chairman" where it appears on page 195, with the exception of Amendment No. 13, which would delete the word "either" and insert "any".

I hope that I have therefore explained this rather extensive group of amendments. This group may be large in number, but it is in effect arguing the case for good corporate governance.

I recall that when we debated this issue before, we had a look at the Cadbury report. This is a good opportunity to remind ourselves of that groundbreaking report which set out a number of aspects of corporate governance that have since been adopted almost completely. I think that the Cadbury report did a great deal of good in setting out some of the basic principles of good corporate governance. Paragraph 4.7 of the report, on page 21, addresses the whole issue of the chairman and envisages the chairman's role as follows. It states:

"The chairman's role in securing good corporate governance is crucial. Chairmen are primarily responsible for the working of the board, for its balance of membership subject to board and shareholders' approval, for ensuring that all relevant issues are on the agenda, and for ensuring that all directors, executive and non-executive alike, are enabled and encouraged to play their full part in its activities".

At paragraph 4.9, the report continues:

"Given the importance and particular nature of the chairman's role, it should in principle be separate from that of the chief executive. If the two roles are combined in one person, it represents a considerable concentration of power".

When we last debated the Cadbury report, at the Committee stage of the Financial Services and Markets Bill, I recall that the noble Lord, Lord McIntosh of Haringey, said:

"I doubt whether they"— the Cadbury rules—

"are the most recent thinking on current good practice".—[Official Report, 16/3/00; col. 1717.]

As that was an interesting observation, I have turned to the Hampel report, which also dealt with the chairman and chief executive, in 1995.

The Hampel report was established to review the Cadbury code. On page 28 of the report, however, the chairman's job is described in exactly the same terms as Cadbury had described them. It states:

"The chief executive officer's task is to run the business and to implement the policies and strategies adopted by the board. There are thus two distinct roles".

The report went on to say that it endorses the Cadbury description.

At paragraph 3.17, the Hampel report continues:

"Cadbury recommended that the roles of chairman and chief executive officer should in principle be separate . . . We agree with Cadbury's recommendation and reasoning, and we also note that in the largest companies there may be two full-time jobs".

Cadbury, of course, spoke of a non-executive chairman and not a full-time chairman.

"Our view", said Hampel,

"is that, other things being equal, the roles of chairman and chief executive officer are better kept separate, in reality as well as in name. Where the roles are combined, the onus should be on the board to explain and justify the fact.

Cadbury also recommended that where the roles of chairman and chief executive officer were combined, there should be a strong and independent element on the board, with a recognised senior member . . . But even where the roles of chairman and chief executive officer are separated, we see a need for vigorously independent non-executive directors".

So that was Hampel. In order to persuade the Minister that this is the bang-up-to-date view, I wanted to submit two further pieces of evidence. The Chartered Institute of Management Accountants produced a report—a guide to corporate governance—in which, on page 9, it made it absolutely clear that it endorses that position on chairman and chief executive. It states:

"The chairman of the board is responsible for the efficient running of the board . . . He . . . is therefore responsible for ensuring that the . . . Code's principles and provisions are followed. These require that there should be a clear division of responsibility at the head of the company so that no one individual has unfettered powers of decision".

On page 10, in describing the chief executive, the report states:

"The chief executive is responsible for the efficient running of the company's business. He has, therefore, quite a different role from that of the chairman of the board. The Combined Code states that 'a decision to combine the posts of chairman and chief executive officer in one person should be publicly justified'".

So we come to today.

The second piece of evidence is from the National Association of Pension Funds, which only last week produced a report in which it criticised the failure of a number of companies to observe the code. In an article in the Evening Standard entitled, "Drop those dual roles at the top says NAPF", it criticised companies which were still seeking to combine the roles of chairman and chief executive here, a decade after corporate governance pioneer Sir Adrian Cadbury criticised the practice. NAPF is described as the City's most powerful shareholder group, and it made it clear that it regarded that as unacceptable behaviour.

The Minister may seek once again to persuade us that the new Office of Fair Trading is unique in the world of corporate governance or—I refer to subsection (1) of Clause 1—in the world of bodies corporate. It is to be a body corporate. Therefore, I believe that the Government should pay more heed to the principles of good corporate governance.

Some would say that the principles of control freakery run so deep in this Government and in the institutions they create that that could constitute an explanation. However, it would be a brave Minister who would justify the matter in such terms before the House on Report. I hope, therefore, that the Minister might consider—if he wishes to intervene I may be able to cut short an otherwise long explanation in dealing with the other amendments—saying at the Dispatch Box, "Don't worry, we will observe the principles of good corporate governance and have a chairman and a chief executive". However, he shows no sign of leaping to his feet. Therefore, I shall now say why I thought that he would not do so.

We have the advantage of reading in the Sunday press an advertisement for the new Director-General of Fair Trading which stresses what an important job he or she will do and the fact that he will be given many more powers than the existing Director-General of Fair Trading. The advertisement seeks to attract non-executive directors to what is termed "the strategic board". As I understand it, that is the only board of the Office of Fair Trading but perhaps the Minister will explain the word "strategic". However, it certainly spells out the importance of that body.

In seeking to persuade people to apply, the advertisement states that the OFT has wide-ranging enforcement powers and will in future carry out some cartel investigations under the criminal law regime. The new director-general will have more wide-ranging powers than the existing director-general. But where is the strong independent element? The advertisement is for non-executive directors. What kind of commitment will they give? Will it be for most of the week or most of the month? No, non-executive directors will need to commit 30 days a year. If one divides that by 12, it is about two-and-a-half days a month. However, the advertisement states that that commitment will be dependent on their involvement in committee work. So, board members may well not commit as many as 30 days per year if they are involved in various OFT committees.

To compound our concern—this may appear a rather unnecessarily aggressive comment for this House when we have yet to decide the matter—apparently the Government have already decided not only that the new chairman will also be chief executive but also—as we discussed at earlier stages—that John Vickers, the Director-General of Fair Trading, will be the full-time chairman and the full-time chief executive of the board. But where is the independent element that is so necessary in a board which is to have these wide-ranging powers? The Minister may well come to the Dispatch Box and say, "Ah, we have a similar situation to the Financial Services and Markets Act in that we have someone who will not take the post unless he is chairman and chief executive". That was the argument used with Sir Howard Davies which carried a great deal of weight with the House as we all considerably respect Sir Howard. He has done an outstanding job as chairman and chief executive of the Financial Services Authority.

However, when we debated the then Financial Services and Markets Bill I recall that the Liberal Democrats commented that they detected that although the Government were not prepared to move on the issue at that moment, they were prepared to consider appointing a chairman and a separate chief executive of the Financial Services Authority when Sir Howard Davies retired. I recall that the noble Lord, Lord McIntosh of Haringey, did not seek to contradict that assumption from the Liberal Democrat Benches. Therefore, I hope that during the course of this debate or elsewhere, the Minister will indicate whether that is still the Government's intention.

After having done an outstanding job in setting up the Financial Services Authority, Sir Howard Davies has indicated that he wishes to retire. I challenge the Minister and his ministerial colleagues to consider appointing a separate chairman or, if Sir Howard is to remain chairman, a separate chief executive of the Financial Services Authority. I believe that that would be a wise move in any event to enable the overlap from one chief executive to another to be more satisfactorily dealt with, if, indeed, the Government are now persuaded to have two separate posts, as I hope they are. I believe that it would greatly assist the governance of the new Financial Services Authority if it were to have a separate chairman and chief executive.

I return to the new Office of Fair Trading. It seems to fly in the face of all the speeches that were made during the course of the then Financial Services and Markets Bill for the Government to insist that the chairman and chief executive should be the same person. I know John Vickers who has been an exceedingly good director-general, but I am sure—as I believe Sir Howard Davies will have found—that it is very helpful indeed to have a non-executive chairman to assist one in handling the extensive responsibilities not only of the Financial Services Authority but also of the new Office of Fair Trading. It would be a good move if the Government were able to accept the amendments we are discussing.

In conclusion, I hope that the Minister will accept Amendment No. 2 which states that,

"the OFT must have regard to the generally accepted principles of good corporate governance".

I said previously that it is similar to the amendment which the Minister moved—under considerable pressure from these Benches and the Liberal Democrat Benches—at a late stage in the then Financial Services and Markets Bill. We are giving the Government a slightly earlier opportunity to spell out the matter. I hope that they will accept the Cadbury recommendation on chairmen and chief executives, endorsed as it has been not only by Hampel but also Greenbury, Turnbull and various other commentators. Indeed, the consultation paper on company law, which I believe was issued only yesterday or at the weekend, endorsed strongly the code and the principles of good corporate governance. Therefore, I hope that the Minister will accept Amendment No. 2. Under the present principles of control freakery I doubt that the Government will hand over the confirmation of the appointments to the Treasury Select Committee in another place. However, if the Minister wishes to surprise me by indicating acceptance of Amendment No. 3, no one would be more thrilled than this noble Lord. I would be surprised, thrilled and also exceedingly satisfied that I had been able to persuade the Minister how important that would be. I urge the Minister to consider that.

Finally, I hope that the Minister will listen to noble Lords on all sides of the House who seek in some way to entrench in a new and exceedingly powerful body the principles that I have outlined. There is a feeling in the Houses of Parliament and outside them that the question of who regulates the regulators must be addressed. A number of regulators have sprung up. I take full responsibility for the creation of a number of such posts, having been a junior Minister at the Department of Energy and having held various other ministerial posts. However, that was at a different stage. Since then, a number of regulators have been appointed. We must now address much more clearly the question of who regulates the regulators. If the principles of good corporate governance are involved, I wish the new Office of Fair Trading well. I beg to move.

Photo of Lord Borrie Lord Borrie Labour 3:30 pm, 15th October 2002

My Lords, I rise to oppose Amendment No. 1 and the consequential amendments grouped with it.

I need hardly refer to Amendment No. 3 because the noble Lord, Lord Hunt of Wirral, has already indicated that he does not expect it to be agreed to. That is right because it would be wholly undesirable, in this Bill and in relation to this particular post, if a broad change of that kind were made; it would involve making the appointment acceptable to a House of Commons Select Committee although no other appointment would be made on that basis. A much broader discussion across the general world of public appointments is needed before agreeing to that substantial change of principle, which I am sure fascinates all of us. We should consider the example of the United States, where Senate approval is needed. However, to introduce that concept in relation to one official in this country on this one occasion would be very odd; we should discuss the proposal on a much broader basis.

I turn to the main amendment. All of the noble Lord's points related to public limited companies. A discussion of corporate governance has been through all of the splendid committees to which he referred, including Cadbury, Hampel and Turnbull; all of them were concerned with the governance of public limited companies. There is no necessary read- across from the governance of public limited companies to government agencies, whether we are discussing the Office of Fair Trading or others. One must consider what is required of each of them. The noble Lord surely cannot argue that Cadbury, Hampel and the rest of them were thinking of bodies such as the OFT, the Office of Gas and Electricity Markets or the Financial Services Authority when it contemplated the problem of the governance of private and public limited companies.

In any case, the noble Lord completely omitted the point that there is no statutory requirement for public limited companies to have the posts of chairmanship and chief executive in separate hands. That is laid down as a recommendation in the combined code that followed Hampel. I have for some years been a sort of serial non-executive director of various companies and I fully agree with those proposals and with the idea that, normally speaking, companies should have a non-executive chairman and a chief executive and that those posts should be held by different persons. However, there is no statutory requirement, and rightly so. The noble Lord wants to introduce a statutory requirement that, irrespective of the particular needs of the moment—or, for that matter, the longer-term needs of the country in relation to the governance of the OFT—there should be a rigid requirement that the posts of chairman and a chief executive should be held by two persons.

The Bill as it stands does not have any rigid requirements to the contrary. It does not require that the posts of chief executive and chairman should be held by one person. The board is described in Schedule 1 and the advertisement for non-executives is part of the process of getting the other members of the board together. The Bill allows for the possibility of those two posts to be held by one person. As the noble Lord, Lord Hunt, accurately pointed out, the Government have indicated that they have it in mind that the first chairman should be not only chairman but also chief executive, and that it should be Mr John Vickers, the current Director-General of Fair Trading. The Bill leaves open the possibility that two persons should hold those two posts, as and when circumstances suggest that that would be better. That flexibility is much more desirable than the rigid requirement for which the noble Lord, Lord Hunt of Wirral, is asking in the amendment; that is, that once the Bill is enacted and without any question, two persons should hold those two separate posts.

Of course there are practical arguments for suggesting that the roles are different. That is shown by examples of the corporate governance of public limited companies. It could be desirable for the chairman to have someone else to take the full burden of administrative and managerial responsibility. There is nothing in the Bill to prevent a deputy from being appointed. The noble Lord will remember that the Minister said in Committee that one or more of the members of the board might be executive members of the board. One of those executives could be a deputy who could be given charge of administrative and managerial responsibilities, and the chairman and chief executive could take the broader role. That seems perfectly sensible.

In order to distinguish the OFT from public limited companies, in relation to which the principles of corporate governance suggest that normally speaking the two roles should be in separate hands, I point out that decision-making under the Bill—we will discuss such matters later—and, for that matter, decision-making under the Competition Act 1998, should be speedy and effective. I believe that the Government have indicated that it is likely that the board will need to delegate to the chairman many executive decisions about mergers and whether there should be an investigation of a particular industry; I support that. I should not like to see diffusion or confusion between two persons of equal authority. One can have a person in charge, of whom it can be said, "the buck stops here", and a deputy, but at this early stage, when the Bill will be beginning its operations, it is desirable, as the Government suggest, that the posts of chief executive and chairman should be held by one person.

Photo of Lord Marsh Lord Marsh Crossbench

My Lords, like many noble Lords, I have held a number of chairmanships. I have also held the post of chairman/chief executive and of full-time chairman with a chief executive. Moreover, I held that post of chairman with a chief executive in a non-public company. I am strongly of the view that the separation of the two posts should be maintained wherever possible.

The job to which I refer in particular was that of the chairmanship for some six years of the British Railways Board. There was a full-time chairman and a full-time chief executive and both of us would have claimed to be fully occupied, although I am sure that that was not always the view of the staff.

The two posts carry two clearly separate sets of responsibilities. A full-time chairman has a very close relationship with the board. That does not mean that he does not have a relationship with the executives; it means that he does not become involved in the detail of the business. He is basically concerned with strategy and the monitoring of progress. The chief executive has responsibility for the mechanics and motivation of the business. As a chief executive, he will spend his time in the guts of the organisation, ensuring that it is running properly. Of course, he will also be directly responsible to the board, but that is a different responsibility from that of the chairman.

Perhaps I may give a classic example of why I feel so strongly about this issue. Over the years, I have been involved with the removal of four chief executives or chairmen. In each case, the pattern was the same. Two or three of the non-executive directors talked to the chairmen, who then talked to the institutions or, in hard times, the bank. If the chief executive is also the chairman, there is no way that the executive directors will put their head on the line because their future employment will be in the hands of the chief executive. They will have nowhere else to go.

I do not believe that this is a deeply philosophical matter; it is an organisational and structural issue. Large companies do not necessarily have available to them supermen, and I include in that some of the signatories to some of the studies quoted. I believe that, wherever possible, the line should be clear, as should the responsibilities. Key organisations, such as institutions, should be able, for example, to talk freely and in confidence with the chairman without involving the chief executive.

Photo of Lord Clinton-Davis Lord Clinton-Davis Labour

My Lords, the noble Lord referred to the situation that is desirable "wherever possible". What would happen if it were undesirable? Would the noble Lord make an exception? Does he not recognise that in the amendment moved by the noble Lord, Lord Hunt, a chairman and chief executive should be appointed in all cases?

Photo of Lord Marsh Lord Marsh Crossbench

My Lords, I am bound to say that I start from the point that I cannot think of a strong argument against the proposition. I have seen it working. There is a long history of companies which do amazingly well, then suddenly a fashionable gladiator of the day begins to emerge and things begin to go wrong. We have seen that occur in some very well-known companies and very often when that situation arises, it does so where the chairman is also chief executive. There is no one else to talk to if one is an outsider. I find it difficult to envisage that a serious organisation would find that the ideal way to administer a company.

Photo of Lord Razzall Lord Razzall Liberal Democrat 3:45 pm, 15th October 2002

My Lords, I rise in support of the amendment moved by the noble Lord, Lord Hunt. I do not want to repeat the arguments that he made so eloquently and with which I entirely agree.

I turn to the remarks of the noble Lord, Lord Borrie. It is always difficult to argue with someone who has held with such distinction the position—or the equivalent position—that we are discussing. Indeed, I believe it is axiomatic among noble Lords that, were the noble Lord, Lord Borrie, in post and were it possible for him to be in post in perpetuity, the noble Lord, Lord Hunt, would not have tabled the amendment and I would not be supporting it. I do not want that to be taken as a criticism of John Vickers, but of course we are not talking about the experience of personalities. Indeed, we all recognise the enormous contribution that the noble Lord, Lord Borrie, made to the post without a separate chairman being in place.

I agree with part of the noble Lord's fundamental analysis, although I disagree with his conclusion. Those of us who argued this point during both the passage of this Bill and that of the previous Bill establishing the Financial Services Authority may perhaps have made a slight error in trying to establish a cross-over from Cadbury—from corporate governance—into this area. It is obvious that there is no exact parallel between the private sector and what we are discussing today in relation to government bodies and government regulators.

One fundamental reason for the current desired structure for chairmen and chief executives in publicly-owned companies is that the chairmen and non-executive directors have responsibility for the shareholders. In this case, no one is suggesting that there is a cross-over and no one is asking who the shareholders are of the Office of Fair Trading—whether they are the public or the Government. No one is suggesting that and I am not supporting the amendment of the noble Lord, Lord Hunt, in some strange quasi-shareholder way.

A fundamental point was made by the noble Lord, Lord Hunt, and it behoves the Minister to answer it. Let us forget the comparison with Cadbury. I believe that, to an extent, it has been a red herring that has led us down paths that have agitated the noble Lord, Lord Borrie, and we would always want his support on an issue such as this. The fundamental question raised by the noble Lord, Lord Hunt, is that of control of the regulators. Contrary to the concerns that existed in the days when the noble Lord, Lord Borrie, performed this function, a serious concern now exists as to the amount of power given to Sir Howard Davies and the Financial Services Authority and to John Vickers as Director-General of Fair Trading. There is a significant issue here which the Government must address. I hope that when the Minister responds, he does not simply demolish the Cadbury argument. Let us take it as accepted that this is not a cross-over from Cadbury into the Office of Fair Trading. I hope that the Minister examines the matter in the context to which I refer; that is, the control of the regulators.

When this issue was discussed in Committee, my noble friend Lord Sharman, who unfortunately cannot be here today, referred to the long-standing fight that the Conservative and Liberal Democrat opposition put up in relation to the creation of the Financial Services Authority. They tried to build into the legislation the split between chairman and chief executive but failed.

In Committee, my noble friend drew your Lordships' attention to the annual report of the Financial Services Authority. The report justified the combining of the titles of chairman and chief executive, now vested in Sir Howard Davies, by reference to the fact that executive responsibility is divided among other members of the board, including those who are managing directors. Contrary to the point that I have just made, the report of the Financial Services Authority went on to say that, as verified by the independent auditors of that body, it was in compliance with the Cadbury code, which recommends the division of those separate responsibilities.

The FSA report recognised the need for a division of those responsibilities. I suspect that the noble Lord, Lord Hunt, is leading the Minister to indicate that as and when Sir Howard Davies stands down, there might be a split in the FSA. The real issue is that to satisfy the Conservative and Liberal Democrat oppositions, the Bill must do that which the FSA requires—divide responsibility among other members of the board. We see no evidence of that in the Bill and if its structure does not provide for responsibility to be divided among other members, we would press the point that there needs to be a separate chairman and chief executive.

Let us accept that Cadbury does not apply—we are not considering a commercial enterprise. Take the BBC as an example. How would your Lordships feel if the suggestion were made in revising the BBC charter that Greg Dyke should run the lot—with no chairman of the governors—and that separation of the roles in a quasi-public body should not exist? Answer: your Lordships would be horrified. That is a fair analogy. When the Minister responds, he should not demolish the Cadbury argument because we can move on from that—but he ought to deal with the BBC argument. What is the difference, on this issue, between the Office of Fair Trading and the BBC?

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Conservative

My Lords, I am surprised that the Government have taken the position they have. We had an interesting debate in the summer, introduced by the noble Lord, Lord Brennan, on the Government Benches, on the subject of corporate governance. The emphasis placed by the Government on the Higgs committee as being the development of corporate governance makes a striking comparison with their proposals.

It is not just a question of public confidence, which requires that best practice is not just followed but seen to be followed. The noble Lord, Lord Borrie, said that there is not necessarily a read-across to public organisations from PLCs. He is absolutely right—but that does not mean that there cannot be a read-across. On this issue there is a read-across on the arguments powerfully made by the noble Lord, Lord Marsh, about the twin pressures at the top of an organisation or company. They are the strategy, which is the setting of the overarching approach that the organisation or company will follow, and the day-to-day implementation that requires the strategy to be carried through in the detail. Those are not separate roles but strategy and implementation do overlap,

It is easy within an organisation or company for one or the other to predominate. Either the company or organisation becomes obsessed with strategy and the big picture, without thinking about the detail, or the company becomes immersed in the detail and loses sight of the wood for the trees. My noble friend is right that each function needs its own champion. The structure of a board, whether of a company or of the OFT, demands two different people.

It might be unfair to say this but the suggestion originally that the two roles should be split was not in Hampel or Cadbury but in Greenbury. The chairman of that committee was of course the chairman and chief executive of Marks and Spencer. When Mr. Greenbury was asked the reason for making that recommendation when he held both roles, he replied, "This is a special case"—rather like the noble Lord, Lord Borrie, saying that this is a special case. The history of Marks and Spencer may have nothing to do with the combination but it is a warning that the Minister should bear in mind.

Photo of Lord Phillips of Sudbury Lord Phillips of Sudbury Liberal Democrat

My Lords, I refer to the much quoted remark by the noble Lord, Lord Borrie, about there being no necessary read-across from a public limited company and a body such as that which we are debating. That is true but the role of the Office of Fair Trading—much expanded by this 500-page Bill—will make it a much more difficult organisation to run than the typical PLC. Its judgments will be highly sensitive, often contentious and always political. If ever there was a need for the extra resource that the twin-officer approach provides, it is here.

For the Minister to suggest that it will be sufficient to have a deputy director is so far wide of the mark that I beg him to reconsider. A deputy is a deputy—an inferior answerable to the person for whom he or she deputises. The post will have to minister to four constituencies—the consumer lobby, the business lobby, the government and political lobby, and the public at large. That will make the job hugely difficult and Amendment No. 1 seems to be common sense.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary (Science and Innovation), Department of Trade and Industry, Parliamentary Under-Secretary (Department of Trade and Industry) (Science and Innovation)

My Lords, I much appreciated the survey by the noble Lord, Lord Hunt, of the various reports on corporate governance and the views of the noble Lord, Lord Marsh. I totally agree, from my experience in industry, that it is entirely right that there should be a split and that is the best way to run companies.

However, the point made by the noble Lord, Lord Borrie—it was his argument as well as his great distinction in his former post that count on this occasion—was entirely right. There is no direct comparison to be made between how one runs a public limited company and a non-ministerial department. The issues are quite different. The reason for having the split between chairman and chief executive in a public company has to do with its relationship with shareholders, which is clearly different from the relationship between the head of a non-ministerial department and the Government. I agree with the noble Lord, Lord Razzall, that we should forget about that unrealistic comparison and look at the subject on its own merits.

The noble Lord drew an interesting comparison with the BBC but again, that is a completely different situation. The BBC is a big organisation with large operations. Where there are large operations as well as a need for strategic thinking, the model is closer to a public company.

Photo of Lord Marsh Lord Marsh Crossbench 4:00 pm, 15th October 2002

My Lords, I cannot follow the Minister's argument. There are numerous organisations in the public sector where the Government of the day—whatever the rules and regulations say—will wish to speak to someone in the organisation about the way it is managed. All of us who have been Ministers have done that sort of thing. There must be someone to whom Ministers can speak. To talk to the chap in charge of the organisation's management specifically and solely is not always productive and reliable. Over the years, Ministers, in my experience, have talked to the chairman.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary (Science and Innovation), Department of Trade and Industry, Parliamentary Under-Secretary (Department of Trade and Industry) (Science and Innovation)

My Lords, the situation does not parallel that of a public company. It is much easier for a Minister or someone else to discover what is thought about the performance of a public body. The Minister does not need the intermediary of a chairman who can be used to take action on the executive side. I do not believe that the situation is parallel to that or that one can make that comparison. All these situations must be considered on the basis of the particular kind of organisation and the job which it does. In that context I shall deal with the situation here.

Amendments Nos. 1, 4, 5 and 8 to 16 would create a separate post of chief executive of the OFT. At present the Bill provides for a chairman and no fewer than four other members appointed by the Secretary of State, with the Secretary of State consulting the chairman before appointing any other member.

We have taken account of the OFT's particular circumstances in deciding not to separate the roles of chairman and chief executive at this time. The Secretary of State will appoint John Vickers as chairman for the remainder of his current term as Director-General of Fair Trading, honouring the commitment made to him when he was appointed to that post. John Vickers will work together with the other members of the OFT. Given his position, and to provide for some continuity through this period of great change, I do not think that the OFT should necessarily separate the roles of chairman and chief executive at this time. However, while the Bill does not provide for a separate post of chief executive, nor does it preclude it. If at any time the OFT wished to go down that route, it could create a separate post of chief executive and select the appointee.

That raises another important point. The amendments would create a post of chief executive appointed by the Secretary of State. In contrast, the approach we propose, where the OFT could, if it wished, appoint a separate chief executive in the future, gives the board much more independence and discretion. It is also consistent with the approach taken throughout the Bill and with other regulators. The chief executive of Postcomm is appointed by the chairman, which is a Secretary of State appointment, and the chief executive of Ofcom will be appointed by the board.

Amendment No. 3 would require the appointments of chairman and chief executive to be approved by the Treasury Select Committee. I have already given my reasons for not creating a statutory post of chief executive in the Bill. As regards Select Committee approval of the post of chairman, I would point out that John Vickers was appointed as Director- General of Fair Trading in line with the Nolan principles, and through an open competition. He was appointed on the understanding that in due course he would become the first chairman of the OFT. His successors as chairman will similarly be appointed in accordance with the Nolan principles and after a fair and open competition. In my view giving a Select Committee the power to veto this appointment would serve to undermine the operation of the Nolan procedures. It would make a fair and open competition meaningless.

I would also point out that the OFT will be a non-ministerial government department; a part of the executive branch. It would introduce a wholly new constitutional principle for appointments in government departments to be subject to such scrutiny.

Amendment No. 2 would oblige the OFT to have regard to the generally accepted principles of good corporate governance in its affairs. We discussed that point in Committee. I said then that I would certainly expect the OFT to act in accordance with the principles of good governance insofar as they are relevant to the OFT, but that I considered that a matter of good administration rather than something to go on the face of the Bill. I remain of that view. The OFT is a government department, not a public limited company, and many of the principles of good corporate governance are aimed at business practices which do not have an obvious equivalent in government.

The OFT's strategy and activities will be set out publicly in its annual plan and annual report. Under Amendments Nos. 19 and 20, to which we shall come shortly, its draft proposals for the annual plan, which may take the form of a draft plan, will have to be consulted on publicly and laid before Parliament. The annual report must also be laid before Parliament. The combination of the plan and the report will ensure that both Parliament and the public are engaged in the OFT's work; that they can influence it and can monitor its performance. The chairman of the OFT, like the DGFT at present, will be accountable to Parliament through his appearances before Select Committees, especially the Trade and Industry Select Committee and the Public Accounts Select Committee.

The OFT will also publish other reports of its work (Clause 4) to keep the public informed of its activities. Indeed, currently the DGFT's office publishes decisions, advice and a range of materials on its website, which we expect the OFT will continue to do, as well as to run roadshows for consumers and business, and participate in outside events to get its message across.

To conclude on this group of amendments, I emphasise that we are already depersonalising competition and consumer regulation by creating a statutory authority with at least five members. We expect the board to have a majority of non-executives and we are giving the OFT significant independence from Ministers. With the appointment of John Vickers as chairman, we are providing some continuity, which in this case is enormously important. If in time the OFT should decide that it would prefer a separate post of chief executive, it will be able to select one. I believe that that is the best way forward. In the light of those arguments I invite the noble Lord to withdraw the amendment.

Photo of Lord Mackay of Clashfern Lord Mackay of Clashfern Conservative

My Lords, before the noble Lord sits down, can he help as to the power under the Bill by which the Secretary of State has appointed a chief executive?

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

My Lords, I am grateful to the Minister for his response. However, I believe that a question raised by the noble Lord, Lord Marsh, exposed a paradox in the Government's case. In response to the noble Lord the Minister stated that Ministers do not need an intermediary, as if the OFT was not an independent public body and the Minister would fulfil the role of being a recipient of representations, which would then be communicated to the chief executive or, as is proposed, the chairman and chief executive. I remind the Minister that the advertisement, which presumably he authorised, states clearly that the Office of Fair Trading is an independent public body.

In response to the noble Lord, Lord Razzall, who made an important point about Cadbury, perhaps I may say that my point is not to embrace Cadbury alone. I tried to combine it with the pamphlet on corporate governance produced by the Chartered Institute of Management Accountants (CIMA), which was responsible for the combined code. As the noble Lord, Lord Marsh, and my noble friend Lord Hodgson of Astley Abbotts pointed out, CIMA states that that should apply to all organisations. That is the intrinsic point I sought to make. I recognise that the noble Lord, Lord Borrie, belongs to that exclusive club of existing or past director generals of fair trading. I bow to his knowledge of the organisation. However, I believe that the noble Lord, Lord Razzall, made an important point. We are asking the question, "Who regulates the regulators?" Therefore, this has been an important debate on that subject.

As the noble Lord, Lord Phillips, stated, we are dealing with a highly sensitive, political and controversial body, which will have to make a whole range of decisions. Therefore, I urge the Government to practise what they preach and to have a separate chairman and chief executive. I recognise that the noble Lord, Lord Borrie, stated that they may do so at some stage in the future, and the Minister seemed to urge that. However, we are dealing with today. The Government made clear in an advertisement that the first chairman will also be chief executive. That is why I believe I should test the opinion of the House.

On Question, Whether the said amendment (No. 1) shall be agreed to?

Their Lordships divided: Contents, 134; Not-Contents, 123.

Division number 1 Private Parking: Ports and Trading Estates — Enterprise Bill

Aye: 132 Members of the House of Lords

No: 121 Members of the House of Lords

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Resolved in the affirmative, and amendment agreed to accordingly.

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative 4:20 pm, 15th October 2002

moved Amendment No. 2:

Page 1, line 8, at end insert—

"(4) In managing its affairs the OFT must have regard to the generally accepted principles of good corporate governance."

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

My Lords, I have already spoken to Amendment No. 2. I should like to test the opinion of the House on it. I beg to move.

Photo of Lord Dean of Harptree Lord Dean of Harptree Conservative

Amendment proposed: page 1, line 8 at end insert the words as printed on the Marshalled List. As many of that opinion will say, "Content". To the contrary, "Not-Content". Clear the Bar.

Division called.

Tellers for the Not-Contents have not been appointed pursuant to Standing Order 53. A Division therefore cannot take place, and I declare that the Contents have it.