Public Limited Companies (Financial Regulation)

Part of the debate – in Westminster Hall at 4:22 pm on 13th March 2003.

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Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury 4:22 pm, 13th March 2003

I was a shareholder in Marconi and know the history well. I would say the reverse—a compliant board broadly agreed with unrealistic and over-ambitious schemes. The previous leader of the old GEC company—hon. Members will remember that he died not long after Marconi's collapse and was almost heartbroken about the demise of the business that he had built up over 30 years—had run that business with a rod of iron, taking little notice of the rest of his board. I would say that it was more of a Higgs board that led to the Marconi collapse than an old-fashioned type of business led by a strong character.

That leads to another major point. It is dangerous to lead the public to think that Higgs would be a solution for companies that are badly run and making bad decisions. It has been a great mistake to lead the public to believe that regulation means that they need not take responsibility for their own investment decisions, and there are dangers in theoretical panaceas to address problems that cannot be effective in practice.

I see no logic for suggesting that a chief executive cannot mature to become chairman. A company that I would have thought was greatly admired and liked by the Government—Unilever—has thrived on that principle for many years. It is useful and important that the chairman knows and understands such a large business, and I see no impropriety in principle in that. Indeed, there has often been a problem for companies when chairmen and chief executives have come in from outside without knowing the business and one has presided over the other making a mess of it.

I want to pose a question. What happens if a retiring chief executive becomes chairman of a rival company? It is a serious practical risk that if someone retires at 55 and knows an industry well but cannot naturally become chairman of his old company, he will be an attractive recruit to a rival company.

The suggestion that non-executive directors should serve only six years is a mistake. It may make sense for boards to be able to get rid of them, but that can be arranged contractually. Many non-executive directors will not have got to grips with a company for two or three years, and I do not see the logic of a six-year term.

Finally, I support the principle that the posts of chief executive and chairman should be split. That is a long-standing recommendation, but I note that the Competition Commission did not want to do it, and Sir Howard Davies of the FSA was determined not to do it. However, the Bank of England is set up so that the two roles are effectively combined in the governorship. The public sector should follow the same rules, and I repeat that although I broadly support it, it does not always make sense, certainly for a small business, for the two rules to be combined. What are the Government's proposals for those other than FTSE companies? There have been suggestions that the costly and cumbersome structure would not apply to listed companies, but from a practical point of view, large FTSE companies could probably cope with it. That could be positively damaging for smaller companies.

My worry, and something that I have seen happen here and in other parts of the world, is that a board controlled by non-executives would end up going through the motions rather than running the business. The business would instead be run by an informal committee of the senior management, and the net effect of the proposals would be contrary to the intention. That results in what I call an unofficial running of the business, not a transparent system recorded in the minutes, and that is one of the biggest dangers. It is a practice that occurs a lot outside the United Kingdom, and it is a mistake to require a majority of non-executives because it tends to tip the balance that way.

Although the report is about public limited companies and the private sector, the highest standards of accounting and propriety in management should also exist in the public sector. The hon. Member for Bexleyheath and Crayford rightly referred to improper practices of off-balance-sheet financing that have taken place in the United States and, to some extent, here, and I draw the Chamber's attention to the continuing disagreement of principle between Sir John Bourn and the Chancellor.

Sir John Bourn is adamant that the Strategic Rail Authority and Network Rail, under accounting standard FRS 2, should be consolidated into Department for Transport accounts when we move to whole of Government accounting. The result will be, in the words of the National Audit Office, to blow out of the water the mythology that control rests with the business's directors. Sir John is clear that equity control rests with the Government, and each organisation should appear in the Red Book and national accounts with its debt as part of the public borrowings and public borrowing ratios. As hon. Members will have seen, he went as far as to say that he would not sign off the accounts unless that happened. We have the present nonsense that the Treasury has accepted that the SRA and Network Rail will be consolidated into whole of Government accounts, but not into the Department for Transport accounts, which is the key issue in whether the debt is included in the Red Book figure.

I urge the Chancellor to abide by the high standards of accountancy by which we are urging the private sector to abide, and to cut back on off-balance-sheet accounting. The Government have moved to consult not just two accountants, but, as the Minister will undoubtedly confirm, the Treasury is now in discussions with Allen and Overy, which is known to be the sharpest law firm in structuring private sector off-balance-sheet accounting. Let us not have one rule for the public sector and another for the private sector.