I have already given a list of the issues that arose from the two crises that I mentioned in Britain. Those issues are very similar to those that arose in Enron and WorldCom. I do not suggest for one moment that all joint-stock companies are subject to them; however, they can be found in several of them.
This is not only a matter of deficiencies in accounting standards and auditing practice. Those technical issues are important; they are the main theme of the Treasury Committee's report. I wholly support the report's recommendations and I am pleased to see that in the main the Government have endorsed them. However, the fault does not lie solely with the financial maintenance of public companies. There is a deeper malaise in the culture of some public companies—I emphasise the word "some"—that has led to these deficiencies. I do not wish to tar the boards and management of all public companies with those strictures. However, such observations have parallels and echoes in the wider policies of some public companies. The ever increasing rewards of chief executives and directors do not establish a fair differential between themselves and other managers and staff; they accelerate increases in the differential year after year after year without apparent justification.
There are rewards through share option schemes that create perverse incentives in financial reporting. There is a contrast between all that and the way in which occupational pension schemes have been closed or diminished recently, even where the company took pension provision holidays in good years. There is accumulating evidence of people at board level in major companies behaving as if they were a caste apart, which does not need to abide by the same rules of fairness and ethics that apply to everyone else. Much of the evidence that we received concentrates on the deficiencies in accounting and auditing procedures. That, however, does not excuse the responsibilities of executive and non-executive directors, who are actually responsible for preparing the accounts. Theirs is the responsibility for ensuring that a true and fair picture of the state of a company is presented to shareholders. Accountants are advisers. Auditors give a final objective check. If accounting rules are weak and auditors inattentive, the defects need to be remedied, but the fault begins with the members of a board in whose name the accounts are presented.
The question of the ethical behaviour of directors is inescapable when reviewing the question of the financial control of public limited companies, but the ethics become disguised and laundered by some of the language used. Off-balance-sheet accounting too often means keeping relevant information from public scrutiny and so giving a distorted picture of a company's profits and liabilities. Aggressive accounting means sailing as near to the legal limits as possible without actually being illegal.
What is missing from all this cunning is the concept that all commerce—every commercial deal—depends on trust. That is why many of the great merchant families in Britain in the 19th century were Quakers or Methodists; because of their strict ethics, they could be trusted and so their businesses grew. In simple terms, it is trust that lies behind the issues that have given rise to the Treasury Select Committee's inquiry. The root of the problem is the breakdown of trust and the routine acceptance of a culture of institutionalised deception.
There are three dimensions to dealing with the problem, and our report is one of them. It deals with various ways of ensuring good accounting practice and the independence of auditors. The other two dimensions are the modernisation of company law, as mentioned in paragraph 44 of our report, and corporate governance, which is referred to in paragraphs 38 to 41. The chairman of the Financial Services Authority has also drawn attention to the need to modernise company law in the light of the prospective European Union directive. According to its response to our report, it is disappointing that the Government will not be able to introduce a draft companies Bill in this Session. It would be highly desirable for one to be included in the next Queen's Speech. Such a Bill would seem to be a good candidate for pre-legislative scrutiny by the Treasury Select Committee and the Trade and Industry Select Committee. Alternatively, it might be scrutinised by a Joint Committee, a procedure that proved successful in dealing with the complexities of the Financial Services and Markets Act 2000.
Corporate governance has been the subject of a review by Mr. Derek Higgs, whose excellent report, which complements the recommendations of the Treasury Select Committee, was published since our inquiry. It presents a radical but reasoned approach, which is what is needed. It sets out the role and responsibilities of the board and chairman, from which flow ethical guidelines. The emphasis on the board having at least 50 per cent. of non-executive directors is an evolutionary way of ensuring that issues are lifted from the internal concerns of executive directors and dealt with objectively and transparently. The formation of an audit committee from among the non-executive directors will ensure independence in the appointment of and subsequent dealings with auditors, and will promote objectivity in the auditing process and in the presentation of information.
It is also much to be commended that non-executive directors should be responsible for non-executive appointments to the board, so that the chance of the chairman appointing cronies or the 'quiet and persuadable' is eliminated. The idea of one senior non-executive director having a special relationship with shareholders seems to be less obviously beneficial. It may cut across the role of the chairman and create a high risk of unproductive friction. The proposal to limit the number of non-executive directorships to be held by one person is a way of concentrating attention on duties in the company. The days of the non-executive sinecure, with one person holding half a dozen or more directorships, should be over, and quite rightly.
All these sound proposals and others go a long way towards addressing the introspective malaise which can become a conspiracy against the outside world, and it is sad that the vast majority of the chairmen of the FTSE 100 companies, and the Institute of Directors, object to the proposals. The objections are perhaps a confirmation that introspective and cosy arrangements have become too much of a habit. It is as though those chairmen do not recognise the issues that the proposals address. Theirs is not the first—and no doubt will not be the last—vested interest that needs to be overruled for its own good.
In conclusion, I urge the Secretary of State for Trade and Industry to implement the proposals of the Higgs review as soon as possible and to take such steps as are necessary to implement the recommendations of the Treasury Committee report. Company law reform complements those measures and should be dealt with expeditiously. Let us not hear from sections of business or from the CBI the ritualised parrot cry that all this is another imposition of red tape. What is proposed will underpin and enhance public trust in business enterprises, which are a vital part of our society and must act within it, not be detached from it. Nobody gains if business enterprise is widely considered to be a conspiracy against everybody else. Without public trust and understanding of business activities, business will be the poorer and so shall we all.