§ 4.9 p.m.
§ Lord Brennan
rose to call attention to the issues of corporate governance, following the recent reports on non-executive directors, auditing and accountancy; and to move for Papers.
The noble Lord said: My Lords, in a capitalist system there is an inevitable tension between two aspects of human behaviour. One is greed; the other is trust. It is by the resolution of this tension that we control greed, and yet recreate trust where it needs to be recreated. That is the task that we shall debate.
The 1990s were an era of "boom". A German banker commented earlier this year that, in his experience, booms diminish vigilance, induce complacency, make for sloppy thinking and, above all, lead to hero worship. Who are the heroes of the 1990s?
M r Kenneth Lay, who regularly appeared before the United States Congress to demand deregulation, abhorred any public intervention into commercial 1334 activity because with deregulation and without public intervention they could set about their task of maximising shareholder value. The message was preached and we listened, but the time came when we realised that it was not the right message, and that the messengers were those who had given in to greed. By doing so, they had foregone the trust which it was their duty in corporate life to maintain.
Enron involved activities with five major banks. It led to the demise of Arthur Andersen and now involves law firms subject to civil and potentially criminal actions. It was followed by the very substantial accounting irregularities revealed by Xerox. A firm called Sprint was described by a Wall Street commentator as a "serial governance abuser". He was right, because the company spent its time creating stock options which, when thought not to be generous enough by the recipients, led to them demanding that the board reprice the options so as to make them more advantageous.
As for investment banks, the present chief executive officer of Credit Suisse First Boston described its activities in the 1990s as those of a "giant casino". It has suffered a 25 per cent drop in the discretionary funds given to it by outside investors, and it has made provision against action by the Securities and Exchange Commission and other claimants of 600 million dollars.
Companies, accountants, directors and banks all to some extent fell into the problem of greed and, as a result, trust was lost.
I hope that I have not exaggerated this history, nor would I wish to infer that it is representative of the way in which we think and act in this country. However, we cannot take matters for granted.
In Holland, a month ago, Royal Ahold, the third biggest food retailer in the world, declared accounting irregularities of around 500 million dollars. The share price has fallen by 60 per cent. Alltran in France has been threatened with prosecution for giving false information to the markets. Camroad in Germany suffered the indignity of a chief executive officer beginning a seven-year sentence for creating a balance sheet based on fictitious sales. Last year, Elan in Ireland suffered a substantial drop in its value because of off-balance-sheet activities.
Those actions, both in the United States and in Europe, are not separate from the community in which we live as ordinary people. They lead to pensions being lost, savings vanishing and jobs going. They lead to a substantial drop in the financial net worth of corporate activity and, above all, they damage investor confidence. That confidence must be restored; jobs and savings must be protected; and action is required, at least with regard to listed companies.
I accept the sense of the comment that nobody can completely eliminate the determined fraudster, and nobody can guard in every way against the ingenious mind that will find its way around regulation and voluntary controls. However, that does not mean that we should not try our best to ensure that it does not happen.
1335 If your Lordships will forgive the crudity of the introduction, I shall speak on the bosses and the books. I begin with the bosses and the issue of power. The role of non-executive directors, as envisaged in recent debate and by the Higgs report, is to ensure that three things are avoided: first, lack of independence; secondly, weak oversight; and, thirdly, excessive pay to executive directors.
Allowing for the debate that will take place about the Higgs report, one can crystallise the role of non-executive directors, briefly but accurately. Their central job is how to deal with the chief executive officer—how to choose him and, having chosen him, how to evaluate his or her performance continually, with an eye to good financial standards. That is a short but, I hope, appropriate encapsulation of the duties of a board.
Who would best fit that requirement? The objective observer would say that it would be the non-executive director, because he or she does not have an immediate interest in terms of compensation or career such as executives have. It is the non-executive director's role to make the balance between the entrepreneurial drive of the permanent staff, coupled with intelligent comment and, when appropriate, pointed criticism. Surely, that is what the Higgs report seeks to achieve. At least half the board should be non-executive; independence should be strengthened, and there should be a clear separation between the roles of chief executive officer and chairman.
The CBI's reaction to the Higgs report was a little disappointing. Of the 100 heads of the FTSE companies approached to answer the questionnaire, only 61 were able to do so. That is a low response from such a small number of companies to what is probably the most significant report about corporate life that they will face in the next few years. The response is in the form not of a report, but of a summary of a questionnaire reviewing the answers to four questions.
The response to two of the questions is an extreme reaction against two Higgs' suggestions. Respondents objected, first, to the suggestion that the nominations committee should be chaired by an independent non-executive director and, secondly, to the role suggested for the senior non-executive director in relation to the chairman of the company. The voting response showed a more balanced reaction to two other suggestions: first, that there should be a meeting once a year of non-executive directors without a chairman; and, secondly, that the roles of chief executive and chairman should be separated. As yet, we have no response in terms of CBI thinking about independence, systems of appointment, training or tenure. I hope that it will come soon.
The critical question that comes next after attempts to control the power of chief executives and chairmen is that of pay. Whatever we thought a few years ago about rewarding the entrepreneur, as we were told, "high payment required"—and looking to just the recent past—the fact is that the payments reached levels that could properly be described as grotesque. 1336 Share options are the vehicle for such reward. As one is maximising shareholder value, the inevitable temptation to any ambitious man or woman is to maximise the value of his or her share option. That objective is perfectly reasonable if it balances with the long-term development of the company. It is not reasonable if it becomes the primary objective.
Therefore, the recent Smith recommendations about audit and remuneration committees are surely unexceptional. The first recommendation is that they should be made up of entirely independent directors, one of whom should have relevant financial experience. The second is that they should monitor the performance of the company's auditors. The third is that they should exercise special care as to non-audit services. Europe will add to those recommendations. Internal Market Commissioner Bolkestein is about to issue voluntary proposals on corporate governance. The noble Lord, Lord Sterling of Plaistow, is reported in this morning's newspapers as saying that these proposals from Higgs—and others like them, I infer—create mistrust, are highly divisive and will stifle entrepreneurial drive".I disagree. As he said:The objective of a board is based on trust",but the higher objective is that the investor and the public should have trust in corporate integrity.
I am happy to say that I can be brief on auditing and accounting, because I understand that the major firms and the thinkers in this field have accepted the general thrust of the audit report of the Co-ordinating Committee and the new accountancy approach which has led to some significant proposals. Other changes include: Sir David Tweedie, a very persuasive and powerful proponent of UK practices, to be the new head of the IASB: by 2005, all listed companies within the European Union to follow the standards of that board; and by that year, if possible, convergence between us and the United States on accounting standards.
I conclude by suggesting that it will be good for corporate life and good for all of us if business schools emphasise the principles of good corporate governance as part of training and if we in Europe set up a European Centre for Financial Standards to investigate how they are presently working, how they might need to be changed and how corporate life can properly be educated about them.
The proposals in all these new reports, although they may be debated in detail, are surely tough and yet measured. There has to be a correct balance between rule making and playing by the rules. If you do not play by the rules, you cannot be too upset if you face some rule making. The question is how we strike the balance. In the debate which I hope that we will now enjoy, the balance must be determined by society, not by the corporate world. Democracy is the counterweight to capitalism. We in Parliament debate how that counterweight should strike the balance: the least amount of regulation, but the greatest amount of 1337 trust to be expected, all in the service of corporate profit and health, for the general good of the community. I beg to move for Papers.
§ 4.24 p.m.
§ Lord Freeman
My Lords, I congratulate the noble Lord, Lord Brennan, on this important debate. It is almost one year since he introduced a similar debate and it is timely that we should return to the subject. He has painted skilfully on a very large canvas. In the limited time available to me, I intend to focus on just a few points. I agree with a good deal of what he said in specifics, particularly about the Higgs report. I shall come to that in a moment. I declare a number of interests which I have registered but in my judgment they are not relevant to this debate because I speak for myself and based on my experience.
In the debate 12 months ago, the noble Lord called for no complacency and for action. He pointed to the events in the United States to galvanise both public and private sectors in this country into action. That has happened. Thank goodness we had a co-ordinating group chaired by two very able junior Ministers to, as it were, look after the great number of reports that have been presented by both the professions and the public sector. I should like briefly to record some of the most important ones. There was the government review of the regulatory framework to which the noble Lord, Lord Brennan, referred; the report of the Office of Fair Trading; the Treasury Select Committee report; the Higgs report; the Smith report—and, incidentally, Sir Robert is the chairman of the Financial Reporting Council, the new regulator of the accountancy profession; professional guidance issued by the leading professional accountancy institute in England; and the Report on a Modern Regulatory Framework for Company Law in Europe, the chairman of which was Mr Jaap Winter, published just before the end of the year.
In my judgment, the response in the United Kingdom in the 12 months since our previous debate has been measured, proportionate and practical. There is much to be welcomed. I have four points to make in as many minutes. It would be helpful if the Minister responded to some or all of them in his reply. The first is on Europe. I think that it would be fair to say that the United Kingdom has had a record of leading reform of corporate governance ahead of other European nations. Looking back over the past 12 months, particularly to the recommendations on auditor independence from the European Commissioner last May, I think that the United Kingdom has responded well by accepting all the recommendations. Briefly, the recommendations are that the audit partner must rotate every five years; that there should be a cooling-off period, rather like that for the Civil Service, so that an audit partner could not work for his or her client within a period normally of two years; and tighter controls on the non-audit work done by auditors for their clients.
As the noble Lord, Lord Brennan, said, Frits Bolkestein, the Commissioner for the Internal Market, plans to publish an action plan, as he calls it, in May, 1338 to begin the process of setting common corporate governance requirements across Europe. That is to be welcomed, and I am sure that the United Kingdom will encourage the Commissioner in that endeavour. However, the Commissioner himself has quite rightly said that, as each nation has a different history of company law, each will have its own approach to corporate governance. That must be right. I think that his rather enlightened approach to this important subject is to be welcomed.
My second point is on the United States. Thank heavens that we have in this country an approach based partly on a voluntary code. Companies have either to comply with the suggested Higgs requirements on non-executive directors or with Smith on the audit report or explain why they are not complying. That approach seems better than the prescriptive, legalistic approach in the United States. Following Sarbanes-Oxley—the legislation governing the audit and accountancy professions—the SEC has produced literally thousands of pages of regulations, which are either already implemented or to be implemented. We have adopted a different approach, which I very much welcome.
There is a specific problem in relation to the United States which the right honourable lady Patricia Hewitt, the Secretary of State for Trade and Industry, is fighting together with Commissioner Bolkestein. I am sure that your Lordships will wish to encourage the Minister to raise it with the Public Companies Accounting Oversight Board—the oversight board—the new regulator in the United States set up by the SEC, because the Americans seek to regulate UK and, indeed, for that matter, European auditors and accountants if they carry out work for companies that are listed in the United States. So there is double jeopardy and double regulation, which I argue is unnecessary. I hope very much that the Minister will be able to confirm that the policy of Her Majesty's Government is to pursue with the SEC the need to recognise that other countries, particularly in Europe and above all in the United Kingdom, have high standards of corporate governance and regulation of auditors and accountants. The Americans should not seek to begin again the process of regulation of companies that are listed in the United States and audited in Europe.
Thirdly—here I find myself in agreement with the noble Lord, Lord Brennan—the Higgs report is to be welcomed in its entirety. I think that most fair-minded people reading the many recommendations—frankly, many of them have been misunderstood by colleagues in industry and commerce and, indeed, by some newspapers—will recognise that they are prudent and sensible. All of them should be welcomed. The Secretary of State for Trade and Industry is right to welcome the report. I mention one of the many recommendations; namely, that the nominations committee should not be chaired by the chairman but by an independent director, with the chairman sitting on that body. That seems to be a sensible way forward 1339 in terms of best practice as one is thus better able to widen the pool of non-executive directors who wish to serve on the boards of companies.
However, there is one problem with the Higgs report and that is the speed with which it seeks to be implemented—a few months after its publication is far too short a period. When changes were made to the codes 10 or 15 years ago there was a much longer period of consultation and explanation. I plead with Mr Howard Davies of the FSA—the body ultimately responsible for the introduction of the code—to take a few more months to ensure that the code can be explained fully to the companies it covers.
I agree with the noble Lord, Lord Brennan, that the Smith report is excellent. Let us have its recommendations introduced immediately. I have heard no criticism, either within the world of audit and accountancy or in business, of the recommendation that audit committees—we touched on that matter in the debate last year—should govern appointments, pay and the non-audit work of auditors. I hope that when the Minister replies to the debate he will be able to give some indication of when the Companies Bill might be introduced and whether draft clauses could be discussed by your Lordships and another place before we get that Bill. Frankly, a Bill in draft, discussed by your Lordships and another place before it is introduced, is much to be preferred. We have only to compare the recent examples of the Communications Bill discussed in another place and the Licensing Bill to appreciate that argument.
§ 4.34 p.m.
§ Lord Sharman
My Lords, before I begin I must declare an interest. My business interests are set out in the Register of Members' Interests. Particularly relevant to the issue we are debating is the fact that I sit on the boards of three listed companies in the UK and I am the former chairman of KPMG where I continue as a paid adviser.
I should like to thank and congratulate the noble Lord, Lord Brennan, for the opportunity to debate once more the issue of corporate governance—a year ago we discussed the Enron collapse—and the issues affecting corporate governance and audit and accountancy. A number of inquiries have taken place which I shall not list, as the noble Lord, Lord Freeman, has already done so. The reports, certainly as regards the UK—I echo the noble Lord's comments in that regard—have proceeded on the very well proven approach based on broad principles rather than strict rules. To my way of thinking that has the great advantage of recognising the critically important point that no two boards of directors are the same or operate in the same manner.
Mr Higgs is to be congratulated on the approach he took in understanding that good governance is concerned with the behavioural aspects of boards as well as their structure. The Higgs report—I wish that more people had read it in total—makes clear that he takes that into account in making his 1340 recommendations. I believe that is important as at least part of the reason for the failure of Enron, WorldCom, and other companies to which the noble Lord, Lord Brennan, referred, was due to the fact that they operated in an environment with a strict set of rules for auditing, accounting and governance. Strict sets of rules generate an industry composed of accountants, lawyers and investment bankers who design schemes to get round the rules. It is much easier to overcome the objective of the rules than to circumvent a principle based approach.
As the noble Lord, Lord Freeman, said, it is also worthy of note that by and large the reaction of the market-place to the reports is positive. The reports have been well accepted, particularly as regards the recommendations on auditors, audit committees and accounting and their regulation. It is important to recognise the way in which the market-place and the system of regulation work in this country. In that regard credit is due to some of the institutional shareholder associations. Back in April/May of last year the ABI wrote to the chairmen of all the audit committees of the FTSE 100. It followed that up with a subsequent letter to the chairmen of the audit committees of the FTSE 250. In that letter it drew attention to developments in audit committee practice, procedure and policy. It specifically drew attention to the examples of two companies—Unilever and Rio Tinto Zinc—that had addressed those issues in their annual reports. The ABI asked that all FTSE 100 companies should consider doing the same thing. Some time later, Phillips, an international company based in the Netherlands, published its own audit committee charter or terms of reference and policy on auditor independence. That was published over the web and was a first.
As a result of those initiatives audit committees and boards started to re-evaluate their own policies and procedures. As a result best practice was quickly disseminated. I am therefore not surprised that many of our larger companies will have no difficulty whatever in complying with the recommendations of Sir Robert Smith.
I wish that I could say the same about the Higgs report. There has of late been somewhat more noise as regards the recommendations of Mr Higgs. The concern seems to be that the Higgs recommendations will undermine the role of the chairman. Although that is a concern that is easy to understand, particularly if one is a chairman as I am, Higgs makes it very clear in his recommendations that that is not his intention. He says that the chairman,has a pivotal role in creating the continued conditions for individual director and board effectiveness".It is worth remembering that of the 55 or so recommendations that Higgs makes only some six or seven are the cause of the noise. Like the noble Lord. Lord Freeman, I believe that we should accept the report. There are, however, three issues on which I wish to comment as they constitute anomalies.
I beg to differ with the noble Lord, Lord Freeman, on the nominations committee. It is illogical to expect the chairman to carry out that pivotal role and yet at 1341 the same time not chair the committee. We should remember that the committee is not solely concerned with the appointment of non-executive directors. It appoints the chief executive and chief financial officer. In many cases, it appoints the key executive directors. The chairman has to work with them as a team.
Higgs's recommendations on the interaction of the senior independent director and other non-executives with the shareholders has also created some disagreement. It is accepted by most people that involvement of the institutional shareholding bodies with the companies in which they invest would be desirable. We want to see more of that. The only issue that arises is how we do that and who does it. Higgs recommends a role for the senior non-executive director that is beyond question. He is a backstop. That is Higgs's principal recommendation. If no one else can deal with the problem for the shareholders, the senior non-executive director should.
How do we then understand the themes and concerns of the general body of shareholders? It might well be preferable to suggest a similar approach to that which Higgs suggests between the chairman and the chief executive. Who is responsible for what in the board should be defined, reduced to writing and agreed by the board. With it, there should be the objective that the whole board should understand the themes and issues important to its shareholding base.
The final area about which I am worried is that the chairman and chief executive have no provision for rotation, yet the suggestion is that individuals on the non-executive body rotate every six years. I am not sure that having a rotating body of non-executives every six years, with the chairman and chief executive semi-permanent, will increase the effectiveness of corporate governance. More stability in the body might be desirable.
We have before us the results of a considerable body of work. I am confident that if we proceed along the route of tried and tested approaches of principles followed by "comply or explain", we will make good progress in further developing effective corporate governance. Let us get on with the implementation. We do not need any more reports.
§ 4.43 p.m.
§ Lord Haskel
My Lords, I congratulate my noble friend on introducing the debate. His timing is excellent. The consultation on the Higgs report ends on 14th April, and surely a debate of this nature must be a helpful contribution to the consultation.
I wonder if my noble friend has visited Halifax. In the 19th century, Halifax prospered through business and industry and, after Sir Charles Barry had done a pretty good job building the Houses of Parliament, the people of Halifax decided to engage him to build a town hall to celebrate their commercial success. The phrase "corporate governance" had not been invented then, but the citizens of Halifax decided that they wanted the key to their prosperity to be written on the front of their town hall. The two-word inscription is still there and reads, "Act Wisely". To me, the simple 1342 principle that action and wisdom go together describes corporate governance perfectly. It also deals with the greed and trust mentioned by my noble friend.
I can look back on a career of 30 years in the textile business, which is how I know Halifax. In spite of the list of wickedness given by my noble friend, in this country it has always seemed to me that poor strategies have been a bigger destroyer of businesses than wickedness. Business is a pretty risky affair. Action without strategy or direction rarely succeeds in doing the things that really matter and make a lasting difference. That is why corporate governance is about involvement in a business, not just policing it. I therefore agree with Higgs about enlarging the role of non-executive directors, but I would also like to see it deepened.
Of course it is right that companies should state their values, which will indicate how they will deal with people, conduct their business and behave in their relationships with other stakeholders. However, that has to be more than mere words. No one could argue with a company that stated its core values as respect, integrity, communication and excellence, but those were the stated core values of Enron. They were the words on the banners outside its offices in Houston. They are a modern version of the inscription on Halifax Town Hall, I suppose. The point is that simple compliance with having core values is not enough. Non-executive directors have to be sure that those values are part of a company's culture, and have a part in how a company operates. That needs deeper involvement. Corporate governance is about involvement, not just rules.
I agree with the noble Lord, Lord Sharman, in that we should not run the risk of a prescriptive rulebook becoming a barrier to innovation. Innovation is where our future lies. We cannot hold back technological change. We cannot and should not try to slow the growth of developing countries, and we cannot compete solely on the basis of costs. Our response to faster change and greater competition cannot be protectionism. It has to he innovation, and that is encouraged not by policing behaviour but by getting the strategies right. That is the task of the directors.
I agree with Higgs that non-executive directors have a role to play in instilling a culture of integrity. However, others have an even greater role, such as the professional institutions, particularly the accountants and also the lawyers and bankers, who lowered their standards and allowed themselves to become poachers. They must raise their standards once again so that they become gamekeepers.
But other professional organisations such as engineers, human resources, technologists and designers have an important role to play in addition to supporting their members in their professional work. They agree with me that, in addition, they must give their members the comfort and support of decent values and high standards of integrity to help and support them through the market-driven turmoil of their daily work. At a time when the public are wondering how much they can trust business, it seems 1343 to me that in that way they can perhaps give confidence to the public and comfort to those who have to work every day in the rough and tumble of a difficult business environment. Extending corporate governance to the professions in that way would do a lot to raise ethical standards, which is one of the purposes of the Higgs report.
I also agree with Higgs on the need to widen the pool of non-executive directors and to introduce new blood. We need more, because Higgs is asking for more of them and I am saying there should be deeper involvement. Directors understand that they owe a duty to the company. They are accountable to the shareholders and indeed are responsible to all the stakeholders. To fulfil those duties fully, a director needs to be involved in a company's reputation, its key relationships and its innovation as well as the financial risks. There are many courses, seminars and meetings to explain and discuss all those tasks. However, it seems that we have not seriously set about increasing the pool of non-executive directors and ensuring their professionalism, especially if we are to have senior non-executives.
How is that done elsewhere—in the Civil Service, the police or the Army? How do they promote the meritocracy that Higgs seeks? The answer is that they have a staff college. In this country, we have more than 50 business schools. For some time, I have been suggesting that one of them should turn itself into a staff college for non-executive directors. I refer to a college where people can enter themselves or be sent for a part-time or full-time course to acquire or polish up the skills and knowledge that they need to be an involved non-executive director; a college that can be at the centre of excellence for best practice; and a college that can be part of active share ownership. Such a staff college could borrow the words from Halifax town hall because its task would be to equip non-executive directors to act wisely.
§ 4.50 p.m.
§ Baroness O'Cathain
My Lords, like previous speakers, I thank the noble Lord, Lord Brennan, for bringing this interesting subject to our attention. In doing so, I must declare an interest. I have been on boards of FTSE 100 companies for 20 years and for many years a member of audit committees.
I have lived through all the developments since then, which have been classified by some as the "bad old days". As in every part of life—be it corporate, political, national or even international—there were, and probably are, bad practices. I welcome any suggestions guaranteed to improve the perception that our corporate governance can be relied upon to be honest and transparent. In terms of our reputation, both nationally and internationally, nothing else is acceptable. I deliberately use the word "perception". The word haunts us all the time but it has become central to so much that we do, even here in the House of Lords.
1344 As we are time limited I shall not dwell on the current "perception" of the operation of boards of directors. We have had masses of negative comment. I accept the old adage that there is "no smoke without fire". However, in my experience, boards of directors have worked very hard to fall in line with the demands of successive reports—Cadbury, Greenbury, Hempel and now Higgs—not to mention the continuous recommendations relating to other business issues such as accountancy. The latest recommendation is the Smith report on audit committees and the combined code of guidance.
Boards of directors of all the companies of which I am aware have examined those reports and given a big welcome to much of the content. There is undoubted value in the reports but I fear that we are now getting to the point where boards spend more time making sure that all the corporate governance proposals are met than dealing with very important issues such as strategy. The noble Lord, Lord Haskel, mentioned strategy, and I thought that I would repeat it.
All these proposals are of a "best practice" nature. They are not encapsulated in law. However, the concept of "comply or explain", which has now been brought to the fore by Higgs, seems exceedingly prescriptive. I know there is a feeling, which is quite widely felt, that it is only a matter of time before we are presented with a raft of draft legislation. That will prove exceedingly lucrative for squads of lawyers, as the Higgs report is proving to be to consultants who are peddling advice to boards, and to headhunters already rubbing their hands in glee in anticipation of a huge demand for new independent directors. However, is it going to improve overall performance of British companies and, by extension, the performance of corporate Britain?
Before dealing with the points that concern me greatly I believe that it is not frivolous to point out that the stream of reports on the subject of corporate governance resulting in the "something new" part in each succeeding report has two results. First, proposals have become so numerous that they could well act as a deterrent to truly independent, experienced directors of proven expertise who decide that the approach is becoming just a box-ticking exercise that limits their input to the board by virtue of the preponderance of "measuring up to the best practice" proposals. One company secretary sent me 16 pages of changes to existing practices which must be considered and, fortuitously, today gave me a further checklist of how best we can carry out the proposed evaluation of the board. I refer to paragraph 11.22 of the Higgs report. The latest document he has presented me with is composed of two parts. The first deals with the performance evaluation of the board and consists of no fewer than 62 questions, each of which requires comment, not just box-ticking. That is in line with the guidance in Annex J of the Higgs report. The second part deals with the performance evaluation of independent directors. There are 10 questions requiring detailed comments on each individual independent director. In the case of this particular board, there are eight independent directors, so I have 1345 to ruminate at length on the answers to 70 questions. Unfortunately, I cannot fill in my own evaluation. The costs of running the board could well escalate to such a level that shareholders would be quite within their rights to object.
Let us not forget that the business world has been inundated by prescriptions to improve corporate governance. I shall give a few examples. In the US, there is Sarbanes Oxley, which is the only one encapsulated in law; in France there are two reports, Vienot in the late 1990s and Bouton this year: and there are also all of our reports, which I have already listed. My slightly facetious mind is reminded of a song from "Annie get your Gun"; it is, "Anything you can do I can do better". The process is in danger of taking over. Business entrepreneurship, creativity, the ability to be light on one's feet in grasping opportunities and the ability to compete worldwide could be hampered by concentration on that process.
The really serious points, which have already been mentioned, include the recommendations relating to the choice and role of the chairman. It is crazy to suggest that the chairman should not be chairman of the nominations committee. I am afraid that I cannot agree with the views of my noble friend Lord Freeman on the nominations committee. The proposal is just crazy. The operation of the board depends so much on the chemistry of the board, as demonstrated by the ability of the chairman to have respect for, and trust in, all the directors. How could that be achieved without the chairman's input and, indeed, leadership in the final selection of a proposed independent director? After all, as has been said, that is a pivotal role. A pivotal role not being chairman? How?
Secondly, the only situation in which it would be in the interest of the company for the senior independent director to approach the shareholders would be in the case of a weak chairman who was not up to the job. In such a situation, that should be done by the whole hoard, not just by the senior independent director who might have a not-so-hidden agenda. That would also result in a two-class board, signalling demise of the unitary hoard. I believe that most people in British industry and commerce would agree that that is a good thing. A pivotal role for the chairman? I think not.
The third serious point is that the cost of all of this has so far been passed over. What about the additional reporting requirements—chunks of it—in the annual report? What about the costs of consultants to assist in carrying out the performance review? I have already alluded to costs of headhunters. Costs, cost, costs, my Lords, just at a time when we are all struggling to survive.
The definition of independence makes passing reference to a person being,independent in character and judgement".Those are pretty fundamental personal characteristics, which are so basic that they are unlikely to be diminished in any way irrespective of whether the person sits on a board for six years. That period actually equates to a period of 72 days if one measures the contribution and effectiveness of the director by 1346 attendance at and contribution to board meetings. The noble Lord, Lord Haskel, said that integrity should be introduced. Does he mean that people should be trained to have integrity? Surely people either have integrity or they do not as a basic personal characteristic. If the director has that independence of "character and judgement", how come he or she is in danger of losing those basic characteristics to a point that they,could affect, or appear to affect, the director's judgement"?I quote from lines four and five on page 37. In my personal experience, the longer that one is on the board the more independent one becomes. Let us remember that to lose the services and contribution of an experienced director on the spurious basis of lack of independence, based on a fallible description of independence, is unjustifiable in fact. If it works, do not fix it.
In the time available to us—I am about to overrun—we are certainly not in a position to enumerate concerns or to consider more carefully the more positive points. I hope that if the Government feel minded to encapsulate the recommendations of the Higgs review, they will think long and hard and give your Lordships' House much more time to consider the matter further.
§ 4.58 p.m.
§ Lord Holme of Cheltenham
My Lords, in thanking the noble Lord, Lord Brennan, I point out that I intend to concentrate more on the values that inform the policies and practices of public companies than on the structure of governance. Before doing so, I apologise to the Minister and to your Lordships' House that, not knowing that there would be a Statement this afternoon, I find myself in the situation of having to be at a long-standing commitment in Greenwich at seven o'clock. I may have to leave shortly before the winding-up speeches, for which I apologise.
Ideally, the values of companies should work together with the right structures of governance. However, my point is that to concentrate exclusively on codes, rules and regulations can easily miss the point. After all, the old Soviet Union had, on paper, a most impressive constitution of checks and balances. The Germans, as always, have a word for what I want to talk about—the issue of values. They speak of the Geist—spirit—which is necessary to bring to life the bare bones of formal institutional blueprints. The noble Lord, Lord Haskel, has already referred to that.
Companies are human institutions like any other. They are not value-free, except perhaps in the minds of academic economists. Rotten leadership produces rotten companies, as Enron and others have recently reminded us. Conversely, integrity produces good companies.
First, I shall say a brief word on Higgs. Much of the report is timely and good common sense, and I welcome that, but I find two of his conclusions dubious. Here, I declare an interest as a former member of the board of Rio Tinto, a FTSE listed company, with a continuing role as adviser to the 1347 chairman. Although I believe that it is right to identify a senior independent director and right that institutional investors should, at times of crisis, have access to him—in practice, they do anyway—I consider it entirely wrong that he should beat a path around the City confusing everyone as to the company's normal investor relations.
Incidentally, I believe that one useful and appropriate function for SID—perhaps we should call him El Cid to distinguish him from the British Gas shareholders—might be to make him the ultimate destination for internal whistle-blowers who cannot find satisfaction for their concerns through the specified channels. That would be a proper check and balance for SID.
Then we come to the issue of the chairmanship of the nominations committee. Here, I agree with the noble Baroness, Lady O'Cathain. I can see no case for taking this pivotal role out of the hands of the chairman, one of whose key responsibilities is to build and balance a team. Indeed, the more the chairman is placed, à la Higgs, in a quasi independent mode—non-executive only, not having been a former CEO of the company—the less easy it is to see why that responsibility should be taken away from him.
I now want to revert to the question of sound values, which should be reflected in the way the company is managed and how it does its business. I believe it is idle to pretend that the leaderships of large companies do not face a significant deficit in trust and public confidence. It is often said that we have moved from a "tell me" world to a "show me" world. A great deal of urgent thought is going on in a number of leading companies as to how, by a clear demonstration of the right policies in action, confidence can be earned and trust restored.
That requires leadership from the top of the company—the boardroom. But, if it is to be more than public relations, it also requires ownership on the part of all the employees, and it is noticeable that one of the key drivers to improvement in corporate standards is the wish of able young people to join companies which they feel they can respect. A recent survey by Environics International, the global research company whose advisory board I chair, showed that 83 per cent of employees of large companies believed that the more socially responsible their company was, the more motivated and loyal they were.
Therefore, the key desirable characteristic of a healthy corporate culture is responsibility. By that, I mean that, without diluting in any way the accountability to the shareholder for the creation of long-term value—and how difficult our financial system makes it to keep eyes fixed on the longer term—the company should seek to exercise care, consideration and high standards in all its key relationships with consumers, customers and suppliers, host communities and, above all, its employees. Power in a democratic society—large companies do have power—should always be exercised accountably and responsibly.
1348 That is why the publication on corporate social responsibility, Making Good Business Sense, which I co-authored with Sir Philip Watts, now chairman of Shell, on behalf of the World Business Council for Sustainable Development, recommended that every company should set out clearly what it stands for and the standards of conduct by which it should be judged and then get on with living up to the commitment. A growing number of companies have joined Shell and Rio Tinto in doing exactly that.
In my view, alongside responsibility, the other two cardinal virtues are transparency and a sense of proportion. The merit of greater openness, subject to reasonable commercial confidentiality, should be obvious. Transparency on the part of a company removes suspicions; it allows boardrooms to learn from their mistakes; and it promotes greater confidence all round.
As for a sense of proportion, perhaps I may mention one issue to which the noble Lord, Lord Brennan, referred in his introductory speech. It is an issue where reason seems to have fled from some boardrooms—that of grossly excessive remuneration. It is what Warren Buffett, the sage of Omaha, two days ago called "obscene pay". This contagion has spread from the United States, often carried on the wings of so-called "remuneration consultants" whose recommendations, curiously, always seem to ratchet package levels upwards and never downwards.
Of course, the world of senior executives is internationally competitive and of course exceptional performance should be commensurately rewarded. But what, in some cases, seems merely to be excessive greed, in bad times as well as good, must be curbed if the social acceptance of the useful role of business in society is not to be fatally damaged.
Others have spoken eloquently about setting the right framework. That is important. But if we are to have more than a culture of box-ticking—bare compliance, as it were—and if we are to have a culture of compliance-plus, it is also important to build on the wish of companies themselves to do better in restoring trust. Therefore, my plea for responsibility, transparency and proportionality is in that spirit.
§ 5.6 p.m.
§ Lord Fyfe of Fairfield
My Lords, I, too, congratulate my noble friend Lord Brennan on initiating this debate. Inevitably my contribution is conditioned by my own personal experience. I want to concentrate on the Higgs report.
Until I retired from full-time business around two-and-a-half years ago, I was chairman of the Co-operative Group, the CWS, chief executive of the Midlands Co-operative Society, a director and vice-chairman of the Co-operative Bank, a director of the Co-operative Insurance Society, and the chairman of a footwear multiple. Therefore, I believe that under those circumstances I have breached several provisions of the Higgs report.
Frankly, at the time I undertook those responsibilities, I did not feel that there was a risk of any conflict of interest or, indeed, of my 1349 responsibilities being excessive. But, with the benefit of hindsight—we all have that—I believe that perhaps there were occasions when I took on too many responsibilities and perhaps, at times, there were areas of conflict. Therefore, I believe that Higgs has much to contribute in that sphere. Now I have learnt my lesson. Since I retired, I have confined myself to the chairmanship of the Unity Trust Bank.
The debate on chairmen and chief executives has been fought and won and very few large companies now embody both roles in one individual. From my own personal knowledge, a chairman requires a chief executive and a chief executive requires a chairman. But I want to focus on several items in the Higgs report which some may consider relatively trivial in the scheme of things.
First, I turn to the subject of the ubiquitous SID—the senior independent director. This paragon will attempt to resolve concerns that have not been satisfied by consultation with the chairman or the chief executive. I submit that if that process is necessary, there is something wrong with the chairman or the chief executive, perhaps both. If such a matter arises, surely it is a concern for the board as a whole and should be tackled as a whole. It may demonstrate that something is lacking in the ability of the chairman or the chief executive to solve the problem. In my opinion, SID could become a glorified complaints officer or a focus of discontent. That could lead to disruption in the boardroom and to politics in the board. From my experience of boardrooms, some directors are much more adept politicians than many of the inhabitants of the Westminster village.
I take issue with some speakers on the nomination process for non-executives. If a chairman elected by his peers as capable of chairing a company is not capable of or responsible for chairing the nominations committee, I would submit that a problem exists with that chairman who in those circumstances, as has been said, has a pivotal role. Who should serve that function? Does the ubiquitous—I should not have used that word because it is too complicated—SID come into the scheme of events once again to perform that function and so exaggerate his own importance?
Incidentally, it is not easy to recruit non-executive directors. Capable people with the time, the sense of responsibility and the knowledge to undertake the functions do not grow on trees. Thank heaven that the days have gone when simply by being a Peer or a knight one could be granted a relatively easy passage to a boardroom.
Tenure of office concerns me. While two three-year terms may be appropriate for some companies, the Higgs proposals do not appear to have regard for the size and complexity of some businesses. I speak from personal experience. I was chairman of the Co-operative Group which covered a wide sphere. Overall, all directors were responsible for retailing, farming, travel, funeral, banking, insurance, manufacturing and other sectors. Could any non-executive director entering such a job attempt to master the complexities of that business in two three-year terms? My experience is that non-executive 1350 directors become of real value only when they have had considerable experience of a large business and have become involved in it.
On the remuneration committee, Higgs makes the passing comment that the chief executive's opinion and the chairman's opinion should be taken into account. I do not believe that that is strong enough. The chief executive should always be in attendance. He does not necessarily have to be a member of the remuneration committee but he should always be in attendance at the remuneration committee meetings when the remuneration of his executive colleagues is being discussed. Who better to measure the strengths and weaknesses of his executive colleagues than the chief executive who works with them on a daily basis? Of course, he should not be involved in deciding the remuneration of the chairman or the non-executive directors.
There are many depressing aspects of corporate greed and downright incompetence in British business. I shall not go into them; it is not part of the Higgs remit. I hope that many of the sensible comments that he makes can go some way to alleviate that. I welcome many parts of the report, but there is little point in companies heading for Carey Street—I am being old-fashioned—or heading for Canary Wharf protesting that they have ticked all the right boxes. That would be no consolation whatever to shareholders. Business has failed to regulate itself so often that governments must act, but at the same time they must create the environment in which business can prosper. There should be sensible, although not necessarily benign regulation but not over-prescription. While the report has much to commend it there are some areas in which it lacks practicality and common sense, but common sense is not very common.
§ 5.15 p.m.
§ Lord Stewartby
My Lords, I join other noble Lords in thanking the noble Lord, Lord Brennan, for giving us this timely opportunity to debate a topical subject. Like others, I must declare various interests. Perhaps I may do so in an omnibus way. My current commitments are listed in the register, but at one time or another over the past 30 years I have been a non-executive director of 10 public companies. Currently I am chairman of the audit committee of two financial companies and, for my sins, senior independent director. Not surprisingly, in the past few months my workload has increased exponentially.
There is a great deal of sense in the Higgs report. Inevitably, public comment on it will have focused on those areas where there is a case for disagreement. I do not propose to run through a catalogue of points about which I am a little unhappy. I certainly shall riot open up the subject of the senior independent director, because I believe that it has had more than enough attention outside this Chamber. On a personal basis I am a little anxious about what it may imply.
I want to comment on one or two points to illustrate where I believe that Higgs has become too prescriptive. Independent non-executive directors feature 1351 prominently in the scheme that is now being developed and I wonder whether public expectations of the capacity and effectiveness of non-executive directors are being exaggerated. They play an important role that must be undertaken properly, but some discussions on the subject seem to imply that they can sort out everything on their own, which of course they cannot because they are part of a unitary board. Nevertheless, Higgs has bravely offered a definition of "independent". Most elements that he quotes are entirely reasonable—for example, a conflict of interest in a business connection with another company or a former employee—although a couple appear to me to be arbitrary and not entirely realistic, at least in the light of my own experience.
The first is that if two members of the board of company A are also members of the board of company B, they are both deemed not to be fully independent on either board. I do not believe that that is necessarily sensible. The right kind of people will not be contaminated by having a connection with someone on another board. As the noble Lord, Lord Fyfe, has said, these days it is not easy to recruit good non-executive directors and particularly ones who are willing to serve on audit committees and remuneration committees. I believe that we should limit by an artificial criterion the factors that enable one to qualify. In my experience, one of the most useful ways of judging whether someone will be a good contributor to a board is to have some experience of how he or she already performs on a board. Therefore, knowing his or her performance in another context is a positive advantage.
Sometimes the press give the impression that directors are recruited on a golf club buddy basis. That is far from my experience. These days, most large companies use head hunters because the role of a non-executive director is very complex and responsible and it is not easy to find people capable and willing to carry out such a role. That area makes me uncomfortable.
Another part of the definition of independence relates to the time that board members have served. Six years is far too short for many businesses. That issue needs to be addressed. Anyone who sits on a board for 10 years and at that point ceases to have independence of mind should probably never have been on it in the first place. If one cannot handle that kind of experience, how on earth can one have the independence of mind needed to make the necessary contribution?
One or two long-serving directors on a board arc very useful. Not only do they have historical perspective and know what arguments were previously brought for and against when business issues arise, but over time they can acquire a feel for a company and a feel for the way that the board and the management operate: they get a "nose" for things. If one cuts them off just after they have become really useful, one tends to harm the effectiveness of the board. Certainly, that has been the case in all the companies that I have served.
1352 Both the points which I have raised by way of illustration could be markers for careful reappraisal. If they were, rather than a description of what is expected to be normal practice, it would be valuable. I do not see why they should not be seen in that light. That brings me to the final key point about comply or explain. There is already in the corporate governance industry—because one has to call it that—a tendency towards box ticking. Corporate governance is becoming an industry in its own right. The pressures will be towards compliance rather than explanation, even when compliance may provide a less suitable answer.
I believe that a company should have a board that it needs for the proper direction and management of its business. It should be very sensitive to the Higgs requirements, but it should not be in any way ashamed to provide a robust justification of where it does not comply.
In conclusion, one of the best things about Higgs is that it recognises that detailed legislation on all these subjects would not be in the interests of the process we are all trying to promote. It is important that he and the Government have reached that view. But it will be absolutely essential, if the Higgs formula is going to work well, that companies that arc well run and properly governed should not get black marks for choosing explanation rather than compliance where they think that that is the proper course.
§ 5.23 p.m.
§ Lord Marsh
My Lords, I say at once how much I enjoyed the noble Lord's remarks. I was becoming increasingly depressed by what seemed to be moving towards an uninterrupted "love-in" over a document which I think is significantly flawed.
I declare my interests. I have been a director, as have all speakers in the debate, of 18 companies. I was chairman of 10 of them. They were based variously in Toronto, Montreal, New York, Paris, Hong Kong and London. So I am interested in what goes on elsewhere. I should also declare that I am not only currently the chairman of an investment trust, but that it happens to be a split-capital investment trust. It has paid off all its zero dividend preference shareholders everything they expected on 20th December last year, which was when they expected it. I get that matter out of the way before someone goes to the Library.
The noble Lord, Lord Brennan, opened the debate, as always very effectively, by listing all the terrible things that have happened. They were concentrated understandably very much on what has been happening relatively recently in the United States. I shall come on to that. I say in passing only that he listed the various professions that were usually to be 1353 found involved in these activities. But I could not understand why he left out the lawyers, some of whom played a prominent part in the Maxwell débâcle.
§ Lord Brennan
My Lords, I thank the noble Lord for giving way. He was not concentrating sufficiently. When he looks at tomorrow's Hansard, he will find that they figure clearly in the list.
§ Lord Marsh
My Lords, I am glad that I did not misjudge my affection for the noble Lord.
There was also a reference to the fact that "confidence needs to be restored". My basic criticism of the report—and for me it is a serious one—is that it assumes a level of amateurism at board level which has not existed in this country for some years past. Few human institutions ever achieve perfection and the company boardroom is no exception. But the changes that have taken place over recent years, starting in the mid-1980s and going right through the 1990s, have produced a much more sophisticated and effective corporate governance and financial regime in the United Kingdom and—I am sticking my neck out—it is certainly in advance of that in the United States.
Yet some people are still living in a world where they conjure up this bogey board that is comprised of old colonels and which puts each other's mates on it. Of course there are small hoards that do, but there is a degree of personal liability—and I shall return to that subject—which hovers above every director of a public company. As I have often said, I have never been particularly moral, but I am distinctly cowardly on these occasions and board members do not take kindly to people they cannot rely on and trust nowadays.
So my first point is that the situation has changed. Of course corporate management needs to be continually monitored because change is a constant feature of a modern global business. But the suggestion so often implied in this country that corporate incompetence exists on a scale which threatens a systemic failure is simply not true. If it were true, we would not have the high performance of our businesses in this country in industry and, in particular, in commerce.
I do not believe that Enron could happen today in this country. Having recently had to approve the audit committee report of a company I chair, I was then handed a 13-page draft letter to the auditor which explained in great detail how each member of the board fully understood and took responsibility for every single issue identified in the report and accounts. I do not complain about that. I believe it is a very good thing. But it exists to an extent which is not the case in some other countries.
On that point,. one area where we are weak and where the Americans are ahead of us is that people who commit offences which they must know as directors are "dodgy"—to use the vernacular—should go wherever possible to gaol. If that is not possible, they should at least be disqualified. That did not happen in Maxwell as a result of the embarrassment it would have caused both political parties and it has not 1354 happened in a number of other cases. That is one way far more effective than any other to get discipline into such companies.
So what does that 120-page document bring to the British boardroom? Much of it—surprisingly, given the high reputation of the author—is a series of statements of the obvious that make it difficult to take the rest of the report seriously. I shall cite only a couple of the many similar exercises in banality. In a paragraph on the company secretary—let us remember that the report is addressed to members of boards—it states:The role of the company secretary is important in the provision of information and more widely in supporting the effective performance of non-executive directors".Another paragraph states:The company secretary has a wide range of responsibilities but among those most central to enhancing non-executive director performance are the facilitation of good information flows, provision of impartial information"—and it continues at length and states:All the board also need a clear understanding of the role of the company secretary".If I found that I had joined a board whose members did not understand the role of the company secretary, they would not see my backside for dust.
I choose another example at random. Much of the document views the appointment of hoard members as one would that of executives—but they are not the same. There is, for example, a,Pre-appointment due diligence checklist for new hoard members".It states that the first question that candidates should ask themselves is:What is the company's financial position and what has its financial track record been over the last three years?".Other questions include:What are the exact nature and extent of the company's business activities?",and,Who owns the company … ?".A candidate who would not have already obtained that information should not be allowed out on his own at night, much less join a board.
I am running over my time, for which I apologise. Basically, no board can function effectively unless its members trust and respect each other. Several noble Lords have effectively said that no board can be left to its own devices. The role and responsibilities of directors of public companies are unique within the company. They are not the same as the role of a middle rank executive; that produces constraints and is why directors will usually seek someone with some understanding of board procedures, not necessarily with experience of serving on a hoard, but a senior executive with experience of being called before the board.
This is a bad report.
§ 5.33 p.m.
§ Lord Paul
My Lords, I, too, thank my noble friend Lord Brennan for initiating this debate. I declare an interest as chairman of Caparo Group, a United Kingdom industrial company.
I applaud attempts to amend our business policy and to institute structural reforms of businesses. I therefore welcome the Higgs and Smith reports and hope that we continue to maintain a discussion about mending flawed institutions.
However, the Confederation of British Industry's recent survey of company chairmen suggests that business leaders do not agree with all of the structural reforms proposed in the Higgs report. There is a reason for that concern. If we create too many structural regulations and limitations, running a company may become difficult. For instance, it simply does not seem practical to have directors watching over each other. That would take executive directors' time away from more productive work, making even perfectly honest businesses less efficient and less competitive. Although such efficiency losses would be worthwhile if we could thereby eliminate corporate fraud from our economy, the fear is that such institutional reforms might fail to bring about true change in business practices.
To my mind, there are two issues. The first is that the key to corporate governance is the accountability of individuals and corporate bodies and a clear understanding by shareholders, employees and the community of the obligations and duties of corporate managers. Further work is required in that area. For example, my company Caparo sued for negligence the auditors of a public company that it acquired in which the directors had perpetrated a massive fraud. The case came to your Lordships' House, where it was ruled that auditors owed a duty of care only to the company, not to the investors, shareholders or any other stakeholder.
Although one can accept that as a correct interpretation of the law, it runs contrary to popular belief about the role of auditors in corporate governance. So, in addition to establishing a framework of corporate governance, more needs to be done to communicate to stakeholders at large what are the exact duties and responsibilities of individuals and corporate bodies.
The second issue is more concerned with the future as, so far, we in this country have been fortunate. When a corporate leader comes to believe in material success as an end in itself, no matter what it takes to acquire that success, structural obstacles to fraud and corruption become just obstacles—to be overcome, to be surmounted.
An entrepreneurial individual who has managed to lead a powerful company successfully has already proven his comfort with risk and willingness to face obstacles fearlessly. We must therefore address the most fundamental aspect of corporate governance, which is the personal honesty and integrity of business leaders. For a company to be successful—for it to benefit not just its shareholders but its workers and the 1356 community that it serves—its managers must act ethically. Wealth can be a menace that can sometimes lead decent people astray. I do not say that power and wealth will always corrupt. But although a businessman without ethics may be financially successful, his success will come at the expense of the community at large.
So how can government encourage self-restraint in those who would misuse wealth and power? To be really effective, restraint—restraint that stems from a sense of responsibility and therefore produces moral obligations—must come from within the individual, not from legislation. We are not born with restraint; we must learn by example. Those who accept the need for moral values must expound those principles. As a Parliament, we must embrace discussion of personal ethics and responsibility.
I am hopeful that an emphasis on personal integrity will become an important part of all future discussion of corporate governance. Sadly, we are seeing a new bumper crop of trouble in the business world. We have again seen that the root cause has been greed, coupled with the abdication of personal responsibility. Let us, then, not shy away from an ongoing discussion of how to ensure that ethics—norms of honesty and integrity—become entrenched in the mindset of the entire business world.
§ 5.39 p.m.
My Lords, I join noble Lords in thanking my noble friend Lord Brennan for his initiative in proposing the debate on this important subject and for the clarity and elegance of his introduction. I declare my interests, listed on the Register of Members' Interests, as the chairman of one listed company, an independent non-executive director of another and the director of a number of private companies.
My 15 minutes of fame last year, when I was named runner-up to the noble Lord, Lord Razzall, in the number of directorships declared in the Register of Lords' Interests, illustrates the difficulties of being prescriptive about the number of directorships that might properly be held, given that many of my entries related to a single activity as a venture capitalist. The Financial Times, adopting the journalistic standards of the Sunday Sport—"Elvis Presley is alive and well and sits on the Enron audit committee"—tried then to draw a conclusion on corporate governance and the relationship between Parliament and business, based on an analysis conducted with the thoroughness and logical coherence of a last-minute undergraduate essay.
By contrast, the Higgs report has steered deftly through the opposing rocks of complacency and over-prescriptiveness. Whatever refinements and amendments might be proposed should be warmly welcomed. In the time available, I shall concentrate my comments on the Higgs report. But I welcome the equally helpful and valuable report chaired by Sir Robert Smith.
1357 The expressions of outrage emanating from some of the past and present chairmen of our largest companies do not represent a sensible contribution to this important debate—it is more like the harumphing of bull elephants confronted by the need to walk a little further to find their water hole. I hope that, if in the future my noble friend Lord Brennan introduces a third debate on the subject, some of the distinguished FTSE chairmen and chief executives past and present who are Members of your Lordships' House will be able to put their views directly to noble Lords.
Although corporate governance in the UK is generally good by international comparison and has been improving, we should recognise the many and varied imperfections that have existed and, to some extent, persist. My happy memories as a board colleague of the noble Lord, Lord Marsh, cannot reduce the extent of my disagreement with him on that point.
Ten years ago, the ubiquitous Sir Roland Smith, whose multiple directorships prompted the Financial Times to propose a Roland Smith index of companies, was asked, shortly after his removal as chairman of British Aerospace, what was the most important attribute in a non-executive director. "Loyalty", he cried—and I do not think he meant loyalty towards the interests of shareholders.
Much more recently, when I was advising a substantial listed company, I expressed surprise to one of the non-executive directors at the financial commitments that had been made by the chairman to activities far outside the company's core business without any identifiable process of board approval. "Ah!", said this pillar of the City establishment, "you must understand that we have continued to be run very much like a family company".
Let me read from an announcement made to the London Stock Exchange:Following a preliminary investigation … it is clear that all but a small proportion of the company's cash holdings are no longer under the company's control. The exact whereabouts of the company's funds are still being investigated. However, it has been established that most of the company's funds have been transferred to associates of Orb a.r.l.".The date of the announcement was 10th January 2003. The company, Izodia plc, may not be a household name, and the sums missing—"only" £30 million, I understand—may not rank with the greatest corporate disasters, but it is a timely reminder to guard against complacency.
That last example provokes this question: what do we believe good corporate governance is intended to achieve? Are we most concerned about protecting companies, their shareholders and employees from the foolishness of fools or the knavery of knaves? I believe that it is both, equally. The comments of my noble friend Lord Haskel on that point were correct.
As my noble friend Lord Brennan said, it is undeniable that well-planned fraud is difficult for an executive director, let alone a non-executive director, to detect in time. But an effective board should preside over systems, controls and a corporate ethos that minimise the risk of such fraud being perpetrated. 1358 Companies must take risks to survive, let alone to grow. Sometimes that risk is encapsulated in a strategic decision—or a series of decisions—in which the whole board will have been intimately involved. Whatever the quality or the independence of the non-executive directors, those strategic decisions will sometimes be wrong, occasionally disastrous. But an effective board, once more, with non-executive directors who are, as my noble friend Lord Haskel advocated, constructively involved as well as rigorously vigilant, should improve the odds of success, which, as those of our colleagues who may be at Cheltenham would confirm, is what it is all about.
As the noble Lord, Lord Freeman, said, the Higgs report as a whole should be welcomed because its recommendations should contribute to the effectiveness of boards in both the areas that I have just outlined. I do not believe that the recommendations regarded as most contentious— the role of the senior independent director and the chairmanship of the nominations committee—represent a real threat to the authority or effectiveness of a company's chairman. What is more, those recommendations are always subject to the principle of "comply or explain". In particular, Mr Higgs has justified his decision not to propose separate guidelines for smaller listed companies by the ability of companies to explain their reasons for incomplete compliance.
It is on that key issue that I should like to end. "Comply or explain" lies at the heart of the non-prescriptive approach of the Higgs report and is crucial to the workability of the proposed system, particularly for smaller companies. However, what the principle requires to work is the commitment of institutional shareholders to give the time to assess each company's explanation of partial compliance; otherwise the desired flexibility of Higgs will be lost and its guidelines will instead become by default a rigid set of rules. The institutions, which in my experience have been generous in their provision of time to consider and agree selective non-compliance by a company one-hundredth the size of a top-20 FTSE group, face a significant challenge in maintaining that standard as their caseload continues to grow.
§ 5.47 p.m.
§ Lord Barnett
My Lords, I join those who congratulated my noble friend Lord Brennan on initiating this important debate. I have registered a number of modest interests in non-executive roles in minor companies that are not strictly relevant to Higgs. I assume from the title of the debate that it refers largely to Higgs. There have been many other reports before Higgs—the Cadbury report, the Greenbury report, the Hampel report, combined codes, corporate governance codes, the "Winter group" in the European Union and the Myners report. To those reports we now add Higgs.
In the short time available, I shall not deal with the detail of Higgs. I shall concentrate on the central question of corporate governance: who controls the 1359 major companies, and who should control them? I refer not only to the FTSE 100—some large companies drop out from time to time.
I share many of the views expressed by the noble Lord, Lord Marsh, on the Higgs report. I found much of it trivial and vacuous, to be honest. I shall give some small examples. Page 5 states:The board is collectively responsible".Well, that is a shock to us. It is stated on the same page:The chairman has a pivotal role".He certainly has a role. Page 6 states:All directors should take decisions objectively in the interests of the company".That is a surprise; maybe some do so. On page 77, under the heading "Principle", the report states:Every listed company should be headed by an effective board".Well, there you are. That is what needs to be done. Talk about a statement of the obvious, as the noble Lord, Lord Marsh, said; that is precisely what those are.
We did not need Higgs to tell us the action that was needed. Nevertheless, there are, in those 120 pages, some items with which I agree. There are some proposals that are worth consideration. Certainly, the status quo is not an option, and action is needed.
There is some confusion in the Government's position, if I may say so to my noble friend who will reply to the debate. As usual, I am not sure whether the DTI or the Treasury is in charge of the matter. There have been many Treasury statements about who is backing or not backing the Higgs report or letting it go by the board. Perhaps, my noble friend will tell us. In the most recent article in the Financial Times, we are told that the Government back Higgs. I will be interested to hear my noble friend clarify the Government's position today. He usually accepts my advice: he did so yesterday with regard to excessive remuneration, although he did not tell me what he considered to be excessive.
I hope that he will confirm today that the Government do not have in mind legislation to implement Higgs. That would be the last thing that we need. I assume that my noble friend can tell us that he proposes to have a code-based system and that the code will he in the charge of the Financial Reporting Council, even though, as we are told in some quarters, the FRC is likely to water down Higgs. I will be interested to hear from my noble friend what he would do if it proposes to water down Higgs, which I would not mind.
We are told that the chairman has a pivotal role. That is true, whether he is an executive or non-executive chairman. The chief executive, the finance director and the chairman run the major companies; we need not dispute that. Who appoints those people? That is what I want to concentrate on. Who keeps them in their job, when they do a disastrous job? That is a crucial matter, but it is not a matter for legislation. 1360 Legislation cannot decide who is a good chairman or a good chief executive. It is for the owners of the company to decide.
Not enough has been said about the owners of companies. In most FTSE 100 and other large companies, the owners are not the small shareholders; more than 70 per cent of ownership is in the hands of major institutions. Often, those institutions are not doing the job that they should do. They are responsible—or should be—for the appointment of non-executive directors, who play a crucial role in making sure that the management of a company does a decent job.
My noble friend Lord Fyfe of Fairfield made the good point that good non-executive directors do not grow on trees. That is true. Institutional shareholders are not doing the job. Too many non-executive directors do not or cannot either do the job or give up enough time to do it. That is a challenge to the owners of the company. We do not need to be told that they need integrity; of course, they do. They need competence, as well; they must be able people. Too many are appointed because they are friends of the chairman or the chief executive—not all, but too many. As I said, legislation will not produce better non-executive directors.
The real answer must be for the owners of companies to do the job that they should be doing on behalf of all the shareholders. The major institutions do little or nothing of the job that they should do. If they do anything, it is usually too late. The first solution must be for those major institutions—not the Government—to ensure that non-executive members of boards of companies in which they have a major shareholding are not just cronies, if that is the word, but are good, able people of considerable integrity and ability and do not sit on too many other boards.
The job should include a proper internal audit system. Happily, I do not think that we are likely to have another Enron-type affair here, for the reasons that have been given. Fraud involving collusion between the chairman, the chief executive, the finance director and the senior audit partner would not be easy to spot for even the finest, most able non-executive directors. However, if, at least, there were a proper internal audit system—however costly—there would be a chance of spotting it. Without it, there is no chance. Good non-executive directors will ensure that there is a good internal audit system, and their appointment is the responsibility of the institutional shareholders who own the companies. They are not doing the job: I hope that we can ensure that, in future, they will.
§ 5.55 p.m.
§ Lord Williamson of Horton
My Lords, in intervening in the debate, I declare an interest as a non-executive director of Whitbread plc and a member of its audit, nomination and remuneration committees.
In recent years, there have been several reports—good, for the most part—on corporate governance.They have generated a large corporate governance 1361 industry. I suppose that, like me, all company directors receive their daily postbag of invitations to seminars and breakfasts on the subject. The reports have also generated a remarkable facility among company secretaries for inserting ticks in appropriate boxes.
Now we have the Higgs report, and with it has come an element of unjustified polarisation between the assumption that all the report's conclusions are, almost by definition, good and the opposite view, summarised by the Financial Times headline,FTSE 100 chiefs oppose Higgs reforms".The Minister may say that the Government are more selective in their approach to the Higgs recommendations. If so, I shall be glad to hear that. However, the impression of a polarisation of views is evident in press and other comment.
It would be odd if, after so much attention has been paid to corporate governance, a report were to come forward that was worthy of complete acceptance or rejection. That cannot he the case. There is a series of recommendations: some desirable, others a matter of judgment and some likely to have only a marginal effect. I am in favour of proposals to widen the range of persons—male and, particularly, female—suitable and willing to serve on company boards. I am also in favour of separating the role of chairman and chief executive, not so much as a matter of corporate governance or propriety but because both jobs require a substantial commitment of time and attention. Whatever is done with regard to other recommendations, it is important that nothing be done that, perhaps inadvertently, diminishes the role of the chairman, who has the greatest responsibility for the health of the company.
Some other recommendations are rather innocuous. I would not be prepared to go to the barricades about them, particularly if two things were recognised. First, different circumstances in different companies may make it undesirable to follow a particular recommendation. Secondly—this is self-evident—a company should always indicate why it has not followed a recommendation.
I shall make two more general comments on matters to which I attach importance. First, I am surprised by the assumption that a board consists of two blocs of members—the executive and non-executive directors. In the direction of a company, it is just as likely that there will be disagreement among the non-executives as it is that there will be disagreement between the executives and the non-executives. The fear that executive directors will be hell-bent on some dangerous scheme, while the non-executives restrain them, is, to say the least, an excessively simplified view of the difficult choices on a company's development that the whole board must make. In short, non-executives have a role, and improvements in the way in which it is performed, resulting from the attention given in recent years to corporate governance, are, generally, good. But it is hardly realistic to think that they can, in themselves, determine the development of a company.
1362 Secondly, it is naive in the extreme to suppose that there is a direct and necessary relationship between passing the good governance tests and running a profitable company for the benefit of its personnel, shareholders and the country.
Some facts about past experience, like the facts about loss of value by public companies even before 11th September, are rather uncomfortable. However, I should like to refer to them in order to emphasise that further action on good governance may be desirable in itself but that it does not—I repeat, not—necessarily correlate with good financial results. Even that paragon of financial comment, the Financial Times, in an editorial on Monday stated:Investors have seen share price collapses in companies such as Marconi, BAE and Reuters whose corporate governance would have fallen foul of Higgs",at least implying that there was some connection.
Some of the companies which have gained most in value have been least compliant with past recommendations on governance; and some of the companies which have lost most value have been most compliant on governance. For example, looking at the total return to shareholders of the FTSE 100 companies in the five years ending 2001—thus excluding any distortion from recent political events—some companies made very good increases, but the bottom quartile made a negative return. In short, their shareholders would have done better to put their money on bank deposit, because it was worth less to shareholders at the end of the five years than at the beginning.
However, we also note that these poorly performing companies scored the highest marks for corporate governance; and the best performing companies scored the lowest marks for corporate governance. We must not confuse the form of corporate governance with the reality of long-run total shareholder return. Furthermore, the salaries of the chief executive officers of the worst performing companies were higher than the salaries of the chief executive officers of the best performing companies.
I do not want to be misunderstood. I do not say that that implies that the whole of the corporate governance industry should be thrown on the scrap-heap. On the contrary: I have already indicated that I fully support some important recommendations of the Higgs report. However, the past experience that I have quoted deserves serious reflection, particularly in a period when many pension funds are holding shares in companies which have fallen disastrously in value.
My own conclusion is a more general one. Our prime objective today should be to do all that we can to ensure that we do not have widespread loss of value in public companies. That means attention should be given to the burdens of bureaucracy, taxation and too much short-termism—issues which we all know are wrong—and that we do encourage shareholders to give a lot of attention to a link between salaries and performance. In short, not the form but the substance.
§ 6.3 p.m.
§ Baroness Cohen of Pimlico
My Lords, I, too, thank my noble friend Lord Brennan for introducing the debate. It is extremely timely. We speak of little else in the City. I have been dying to give my own views rather than listening to other people.
Against that background, I declare an interest; I am chairman of a smallish FTSE company and a director of the London Stock Exchange. That makes it particularly important to state that my views are my own. The London Stock Exchange has not yet had the opportunity to take a collective view on both Higgs and Smith; and I should not wish to label them with mine.
Both the Higgs and Smith reports arise out of a statement of objection—as so often occurs—to the state of affairs in America that led to the strong regulatory reaction of Sarbanes Oxley. On thinking about what went quite so wrong in the United States of America and in the conduct of major US companies, it is important to understand that their attitude to accounting—to "doing the numbers"—at that time was very different from our attitude in the United Kingdom. It is odd that I, a lawyer, am defending the accountancy profession, but I think that we always did it differently.
We do not always get it right, but auditors of United Kingdom companies are looking for and certifying that the accounts represent a "true and fair" picture of what is happening in the company. That was not a concept that United States' companies adhered to very much. They believed that there were rules applying to a set of accounts. Within those rules you put your best foot forward—you put down what you could get away with. In the United Kingdom, I believe that our auditors—whatever their omissions and difficulties—have always started from the basis of a "true and fair" account.
That is very different from the American concept of "aggressive accounting", when one tries to do one's best. Of course, there are all sorts of other conflicts and difficulties in US corporate life. but I believe that at the bottom of the worst excesses lays the concept of aggressive accounting—only tell as much of the truth as you absolutely have to, as opposed to the concept of a "true and fair" view of the company.
I always start with the accounts because I believe that they are truly important. Therefore, I have only trivial reservations about Sir Robert Smith's suggestions. Sir Robert and I were colleagues in The Charterhouse Group. He ran a distinguished venture capital operation. No man is better equipped to get at the truth of a company's accounts than a serious venture capitalist who bets his name and reputation on just that ability.
However, I have some reservations about the recommendations of Mr Higgs. I hesitate to offer them because I have been around long enough to remember the cries of grief and outrage from some quarters that greeted the recommendations of Sir Adrian Cadbury. 1364 "Three non-executive directors", we cried in horror. "Chairman and chief executive not to be the same person". "Woe to this fair country."
Although in 20years I may turn to what I say today and wince, I believe that the recommendations of Mr Higgs would, if implemented, make the role of a chairman substantially more difficult. And I speak as a chairman. I need to chair the nominations committee. I need to speak directly to my shareholders, at the same time, and, roughly speaking, say the same as my chief executive officer. If shareholders do not trust either of us, they are quite capable of organising a coup without the help of a senior non-executive director. They would probably use the press; they do not need a senior non-executive director.
The Higgs report is also stiff with recommendations which to a small company will come very expensive. At the company which I have the honour to chair, I would have to appoint another two non-executive directors, in addition to the three we already have, in order to out-number my executive directors. In terms of pay, rations and management, we would be grossly top-heavy. When I raised that point with Mr Higgs recently, he said that all his recommendations were on a "comply or explain basis".
"Up to a point, Mr Higgs" and for that matter, my noble friend Lord Chandos. Tell that to the institutional shareholders who will. I believe, ultimately be driven by their own structures to force us all to comply with every last bit of it—whatever it turns out to be. All right, there are distinguished and visionary institutions which will accept an explanation rather than compliance, but most of them will force us through the whole course—whether this be a code or a basis for legislation. Therefore, I am very anxious about some of the more onerous recommendations.
I agree that more non-executive directors are needed. I have never shared the view that there is a self-selecting crony group of people appointing each other to company boards. If there were such a group, I wish it would ask me to join. But it does not apply to women: I am quite, quite sure of that. I am sure, too, that the noble Baroness, Lady O'Cathain, would support such a group. I do not think that either of us have ever been appointed to a job other than by grinding through the executive search process.
However, there are difficulties with widening the scope. Unless there are to be two classes of non-executive director—one of whom is not required to sign the onerous documents which state that we have looked at the system of financial control, that we are satisfied that it exists, and that we are satisfied that it works—a good deal of technical training will be necessary if the ranks of non-executive directors are to be widened, for instance, into the ranks of academics or other useful groups. Quite a serious training requirement will arise, which I know a good many people are thinking about. I hope, too, that the business schools are considering it, because we shall need new types of recruits if we are to have more and better non-executive directors.
1365 Finally, I would observe that if you want to limit the number of non-executive directorships held by an individual—I think that should be done, or perhaps I am just jealous—then the pay will have to be better. The going rate for a non-executive director is £25,000. If someone has retired early and is serious about maintaining their income as a former senior executive, then quite a number of non-executive directorships are needed to make up the pay. Furthermore, the sheer weight of demands being made on non-executive directors means that we shall have to think about paying them more.
That remark takes me back to the point I made earlier about the burden on small companies. Some of the proposals will prove to be excessive and top-heavy. With those reservations, on the whole I welcome both the Higgs report and the debate.
§ 6.11 p.m.
My Lords, I congratulate my noble friend Lord Brennan on the debate. I certainly support the Higgs recommendations and I am pleased that the Government do so as well. I believe that the House, too, has given a general welcome to the proposals this afternoon.
The Higgs report relates to public companies, but I suggest that the Government should set an example by including certain relevant parts of it in the rules governing non-departmental government bodies, or quangos, which is the term I shall use during my remarks. It is easier to say. I cite the Strategic Rail Authority as an example of a quango that would benefit from some of the recommendations. In doing so I declare an interest as chairman of the Rail Freight Group.
I should like to look at some of the recommendations that might be relevant to a quango such as the SRA. There are many similarities in relation to corporate governance. First, I turn to shareholders. Let us be clear: quangos have shareholders in the form of government, Parliament and us, the taxpayers. Secondly, turn to the question of whether there should be a separate chairman and chief executive. Many noble Lords have commented on this. Higgs has recommended that the roles must be separate, but within the Strategic Rail Authority they are not. The noble Lord, Lord Williamson of Horton, suggested that the roles were too much for one person if they are properly to run a company. I agree with him. We should note that effectively the SRA is managing the railway system.
Within the SRA, the chief executive is the accounting officer responsible to Parliament for reporting on finance and keeping within budget, while the chairman's role is probably to ensure that the shareholders and outside interests are involved. Those interests include parliamentarians, local authorities, pressure groups, real customers, the media and many others. Of course it is also necessary for the SRA to comply with all the relevant legislation, directions and guidance sent out rather frequently by the Secretary of State. I suggest that all that is too much for one person to handle properly.
1366 Luckily, however, the chairman and chief executive of the SRA have a board that meets every two weeks or so. But who appoints the board? Higgs has recommended that the board should be appointed by a nomination committee not chaired by the chairman. One or two noble Lords have disagreed with that proposal. The Secretary of State appoints the board of the Strategic Rail Authority on the recommendation of the chairman. As many public limited companies have noted, it can be said that the board comprises a nice, cosy group of friends—although I realise that my noble friend Lady Cohen would not agree with that Comment—who have every incentive not to ask awkward questions or rock the boat. Perhaps the Higgs recommendation that the board members should sometimes meet formally without the chairman being present would help.
Then we have the customers, or shareholders. Passengers are represented by a statutory body, the Rail Passengers Council, whose duty it is to look after passengers' interests. Who funds that council? It is the Strategic Rail Authority. That is rather like a public limited company funding its own shareholder action group and then complaining loudly if the group disagrees ever so slightly with company policy. I do not think that that quite follows the Higgs line of thinking. He would probably veto such a system. But that is what is happening on the railways.
Another Higgs recommendation states that separate independent directors should be made available to shareholders so that they can raise concerns if contacts with the chairman or chief executive—who is the same person, of course—do not resolve them. That is an excellent idea that again could equally well apply to the Strategic Rail Authority.
Higgs noted that fears are still being expressed that an individual can wield too much power, which may be detrimental to a company or its shareholders. However, the power of patronage, be it financial, in terms of employment or in some other form, makes change quite difficult to achieve. The only forms of redress usually available to shareholders is to sell their shares or to form an action group. It is more difficult for quangos. One can seek redress through the National Audit Office or through judicial review, but some might say that either of those options is possibly a bit nuclear. You would not want to do that every day.
The SRA is in a position similar to that of many plcs at the moment. Apparently it is short of money, while its shareholders—its customers—in spite of their financial reliance on the authority, are becoming increasingly vocal in their complaints about its operation and management. However, they seem unable to do very much about the situation. So I want to urge the Government to set a constructive example here. It is clear that they wish to see the Higgs recommendations implemented in the private sector. I suggest that they could also be implemented. where appropriate, in the public sector. As many recommendations as are relevant and possible could 1367 be applied to quangos such as the SRA. I believe that the authority and other organisations like it would work much better as a result.
§ 6.16 p.m.
§ Baroness Hayman
My Lords, I am grateful to my noble friend Lord Brennan for introducing the debate and to my noble friend Lord Berkeley for taking on the Higgsian spirit of widening the pool of contributions. I thought that I might be the only speaker so to do. I had begun to feel some trepidation, not to say a little regret, that I do not have a remunerated non-executive directorship to declare in speaking in the debate.
I was most taken by the comments of my noble friend about the capitalist system when he introduced the debate. He referred to the tensions between greed and trust created within the system, as well as the importance of the role of good corporate governance in seeking to resolve those tensions. Of course we live in a mixed economy, one that also has a public sector, a not-for-profit sector and a charitable sector. As my noble friend Lord Berkeley remarked, the principles of good corporate governance are just as important in those sectors as they are in the commercial sector. Indeed, Higgs recognised that in parts of his report. Furthermore, the issues of creating trust, maintaining accountability to stakeholders—who are sometimes more diverse, complex and difficult to identify than shareholders—and the difficulties of reporting and measuring success are challenging for those involved.
Here I have interests and experience to declare. Although I have not had experience as a non-executive director in the private sector, I have been a non-executive director—that is, a governor—and chair of a school governing body; the chair of an NHS trust, a unitary body with executive and non-executive members. I am now a trustee—a non-executive—of a small charity and of a non-governmental departmental public body, the Royal Botanic Gardens at Kew. Lastly, I chair a charity whose turnover amounts to a quarter of a billion pounds a year and employs some 3,000 people. The charity has real responsibilities and accountabilities and must face real issues about reporting standards, as well as real issues about its responsibilities towards donors. Thus we have to be sure that we have in place the right processes for reporting.
I have no desire to be overly prescriptive in any of the different areas of the mixed economy. Equally, however, I do not think that we should be overly Panglossian in assuming that at the moment we are doing everything right. The challenges in some of the sectors I have described—particularly in regard to the recruitment of non-executive trustees—are particularly acute. The selection, the induction and the assessment of performance of those who take on non-executive roles are very important. It is sometimes most difficult to achieve in an area where people are not paid. It is sometimes very difficult for trustee bodies to bring in those disciplines because people are giving of their time in a totally voluntary fashion.
1368 However, it is not impossible that they are not doing their job in the best interests of donors and the people who are meant to be the recipients of services. As government uses the voluntary sector more and more in the delivery of public services, these issues will come more and more to the fore.
I look with some interest at the ways in which Higgs can be applied. As I said, there are already new accounting standards in the charitable sector, which will be developed. Reporting standards will equally be developed. The "comply or explain" principle is perfectly appropriate. It is a counsel of despair to say, "It is a perfectly appropriate system but it will not work because the regulators will not follow it properly". It is up to everyone concerned—the Government, the organisations and the regulators—to make sure that it does work and that the explanation can be just as positive and important as the tick-box compliance, which none of us wants to see.
Perhaps I may conclude by saying a couple of words about widening the pool. Some 20 years or so ago in the public sector I had experience of widening the pool of those who became governors and those who became involved in the governance of the health service. Widening the pool—in what, for the purpose of today's debate, would seem to be the reverse way—by bringing people from the private sector into public sector administration was absolutely the right thing to do. It was enormously valuable. The people involved enriched and improved the standards of governance in many areas of public life, as they do in many areas of charitable life.
But I never heard anyone who came in and took up those roles say, in simple language, "This is a doddle compared to my real life. There are no complexities here. There are no challenges here. There are no skilled people working here. There are no talented managers working here". Quite the reverse. They were always seized by the number of constituencies, the number of stakeholders, the complexities of some of the relationships and the nuances of not having some of the ordinary, simple levers to pull or the ordinary measures of share performance, profit or whatever by which to judge performance. It is against that background that I endorse the recommendations in Higgs.
Much has been said about the difficulties of recruiting good non-executive directors. I believe that there is a pool of people in the not-for-profit, voluntary sector with the diverse backgrounds described by Higgs. I hesitate to include women as part of the "diverse background", although apparently we are meant to do so. Women have always been more in the foreground for me and I am not sure that that is the right way to look at the issue.
A conversation was related to me recently about a head-hunter who had found a candidate who completely fitted the personal specifications drawn up by the board. He put forward the woman's name and was told, "No, I am sorry. We had a woman once and it did not work". It is a sad reflection, but it is not unique.
1369 I hope that the recommendations in Higgs in regard to diversity and looking into the wider pool will be carried out in the spirit of improvement and meritocratic appointment, not of political correctness.
§ 6.25 p.m
§ Lord Razzall
My Lords, I join every noble Lord who has spoken in thanking the noble Lord, Lord Brennan, for introducing this important debate. I join every noble Lord who has spoken—apart from the noble Baroness, Lady Hayman—in declaring an interest: I hold the directorships stated in the Register of Members' interests. As the noble Viscount, Lord Chandos, has risen to his and my defence, I shall not intrude on private grief and further lambaste the Financial Times for its misrepresentation of his and my position on its front pages in August. I shall leave that to the noble Viscount's words, which are recorded in Hansard.
It is obvious from the polite debate that has been conducted in your Lordships' House that there is absolute fundamental disagreement between the two sides of the argument. Apart from congratulating the noble Lord, Lord Brennan, on having introduced the debate and the importance of the issue, there was not one thing said by either the noble Lord, Lord Marsh, on the one hand, or the noble Viscount, Lord Chandos, on the other, with which the other would agree. We should recognise that there is a fundamental disagreement, both in the City and in the political debate, on this extremely important issue.
I endorse the point made by the noble Viscount, Lord Chandos—more subtly than I propose to do. We have a number of chairmen and chief executives of FTSE 100 companies in this House who found the time to come and vote for a wholly appointed House—presumably on the basis, with which I agree, that their expertise would be relevant to a debate such as this. It is therefore a great pity that, with one or two notable exceptions, few of them could find the time to give us the benefit of their expertise direct. It is a great shame.
Even the background for the debate would not be agreed by the two sides of the argument. On the one side, a number of noble Lords take the position adopted by the noble Lord, Lord Marsh. They believe that Enron and WorldCom could probably never happen here and that the strength of our corporate governance provisions already in place would be sufficient. That is not a view which the noble Viscount, Lord Chandos, would necessarily share.
As to the perceived excesses of boardrooms, many years ago a Tory Prime Minister referred to the "unacceptable face of capitalism" in regard to the behaviour of the Lonrho board at that time. The view has been ably expressed by many noble Lords that most of the excesses of the past have been dealt with already and that the Higgs report is not closing the stable door after the horse has bolted but is closing a door that does not need to be shut. On the other side of the argument, a number of noble Lords believe that further steps need to be taken.
1370 There is a view—I know that the noble Baroness, Lady Cohen, has not been allowed into the club, and I share her view—that FTSE 100 companies have far too often appointed directors from other FTSE 100 companies who share the company's ethos, in particular in regard to boardroom pay. It is a view which some noble Lords have and others do not.
There is also the view—although one or two corporate colleagues would not necessarily share it—that if you get your friend onto the board as a non-executive director he is unlikely to move for your removal if the company is not doing well. Again, I suspect that that is a view which would split your Lordships.
I hope that when the Minister replies to the debate he will answer a number of questions in regard to the Government's position on these issues. It is all very well for us to have our different views—if we debated this subject for a further three hours, I do not think we should arrive at a consensus—but the Government are in a position to do something about it. These are my direct questions for the Minister to address in his reply.
First, does he believe that an Enron or a WorldCom could happen to one of our major FTSE 100 companies? My view is: Enron less likely, WorldCom more likely—because even with the best corporate governance structure in the world it is difficult to regulate for what was clearly a fraud. What happened at Enron related more to accounting rules. I should welcome the Government's view. Is the Minister prepared to say that the current corporate governance rules—both those that have been implemented and those that will be implemented following the Higgs report—make a situation such as at Enron or WorldCom unlikely?
Secondly—a point raised in the past by my noble friend Lord Sharman which is germane to the accounting position—is the Minister in favour of the National Audit Office being given power to audit the private sector? We understand that the NAO would like to be able to do so. It does not have the same problems as leading firms of chartered accountants as regards a potential conflict of interest in terms of consultancy income.
Thirdly, assuming that the Higgs report is implemented in full—initially for the FTSE 100 companies and thereafter for all the listed companies, down to 350 in number—where will the pool of non-executive directors come from to enable the proposals in the Higgs report to be fully implemented, particularly in the light of the increased directors' liability that directors of major companies, or indeed any company, will necessarily incur, and in the light of the trade-off between those risks and liabilities and the likely fees that will be made available to that pool of non-executive directors?
Fourthly, what position do the Government take on "comply or explain"? Do they say that if almost all companies are simply explaining and not complying they will introduce legislation? Or will they simply say that the doctrine is "comply or explain" and so long as people are explaining, it is not the Government's role 1371 to legislate? What will the position be from the point of view of the Stock Exchange, the ABI and new listings? It is all very well for regulations to be introduced on a "comply or explain" basis for existing companies. but what will happen to new companies? Will the insurance organisations—the ABI, for example—or the pension fund organisations start to say, "We are not prepared to accept the explanation; therefore you have to comply"? "Comply or explain" will not work in an environment in which the quasi-regulatory bodies are simply telling firms to comply.
Finally, are the Government prepared to contemplate a consideration of the idea floated by Sir Lain Vallance—an experienced former chairman of FTSE 100 companies, currently the deputy chairman of one of our major banks and a former president of the Confederation of British Industry—that company law should be amended so that, on the appointment of directors only, it is a case of "one shareholder one vote"? In other words, that, as a shareholder in a company, the noble Baroness, Lady Miller, would have exactly the same vote as would the Pru. That idea has been floated by Sir lain Valiance. I do not know why I picked on the noble Baroness, Lady Miller. It is just habit, I think.
§ Lord Razzall
My Lords, are the Government prepared at least to consider that idea put forward by Sir lain Valiance?
§ 6.35 p.m.
§ Baroness Miller of Hendon
My Lords, why should the noble Lord, Lord Razzall, change the habit of a lifetime?
Like the noble Baroness, Lady Hayman, I cannot declare an interest as a non-executive director because I am not one and it would not be wise to say that I was. However, that does not stop me having a view on what I believe a non-executive director should be able to do. I have been a chairman of voluntary organisations and a charity, and a director of various commercial enterprises.
Unlike an executive director, a non-executive director need not have a detailed technical knowledge of the business that he is entering. I used my experience within a very short time of becoming a member of the Monopolies and Mergers Commission. We found ourselves dealing with aspects of the contact lens business, the cost of music tapes versus compact discs and allegations of predatory pricing in bus services. It was a quick learning curve.
One of the points that I found interesting was that one entered that process without necessarily having any preconceptions. That is quite a good idea, if you are very knowledgeable as a non-executive director, if you have an understanding of administration and business, if you have integrity, if you have worked in large businesses and if you have a grasp of all the matters involved—and confidence, which is essential. 1372 No less important is to have the strength of character to be truly independent of the main board—particularly as you may possibly have an overbearing chairman or managing director. It is your job to look round and see what is going on. You need not be frightened to open your mouth and say what you think and, if necessary, have the strength of character to do something about it.
With those personal views in mind, I read with interest Mr Higgs' job description of a non-executive director. While I have no difficulty in agreeing with what he calls "the key elements" of the functions of a non-executive director—under the headings: strategy, performance, risk and people—I do find it strange that it is suggested that he should also,provide entrepreneurial leadership … ensure the necessary financial and human resources".I thought that entrepreneurial leadership was the province of the executive directors in the day-to-day operation of the company. Otherwise, there would be no difference between the two types of directors; and the non-executive director would have onerous duties and responsibilities without the powers vested in the main board. I think that that is quite dangerous.
Perhaps this is the right moment to congratulate Mr Higgs on the speed with which he conducted his consultation and produced the report, right on schedule as promised. Similarly, Sir Robert Smith and his colleagues are to be congratulated on their comprehensive report of their inquiry, commissioned by the Financial Reporting Council, which was published at the same time as the Higgs report.
When the report was presented to the other place on 29th January, my honourable friend the Member for South Suffolk, gave it a general welcome—which. I suppose, puts me on that side of the fence. He did, however, mention a number of matters that are of great concern to us—I suppose that puts me on the other side of the fence. His points were not fully answered then, but I hope that the Minister will be able to answer them when he replies. I shall come to them later.
The Secretary of State announced in another place that the Auditing Practices Board should,take over from professional bodies the responsibility of setting standards for objectivity and integrity".She said, furthermore, that there would be a new professional oversight board in place of the Ethics Standards Board, and that,a new independent inspection unit, located within the FRC, should take over from the professional bodies responsibility for monitoring audits of listed companies, major charities and pension funds".Thirdly, the Secretary of State said that,the long-delayed investigation and discipline board should come into operation quickly".—[Official Report, Commons, 29/1/03; col. 883.]She promised that the package should be implemented as soon as possible, with changes to the regulatory structure being made immediately.
1373 An implementation steering group has been set up which includes the noble Lord, Lord Borrie. I am sorry that the noble Lord is not in his place. I hope that we shall have some news of progress and a possible timetable for completion of that implementation. That does not mean that I want everything done quickly, as the noble Lord, Lord Barnett, said, but it would be nice to know whether the Government have any ideas on the matter.
How do the Government intend to implement those parts of the Higgs report that they accept? The urgent need for clarification on the mode of implementation arises from the fact that articles in the press during the weekend made it clear that the report has not been received with undiluted enthusiasm. In fact, that may be an understatement. For example, we found a quote that said the Tesco board left Higgs on the shelf. The Times business section carried the headline, "Top chairmen condemn Higgs". The Daily Telegraph headline said, "Top chairmen close ranks against Higgs". It may not be possible to achieve a voluntary code of practice, which is why I asked what the Government intend to do, how they intend to do it, and when.
I now come to our reservations about the report. We agree with Higgs, and disagree with the CBI, on the matter of separating the roles of chairman and chief executive officer. That is a useful proposal, enabling one to keep a check on the other. However, one size may not suit all, and in small companies which have a history, or in a family company, that should not be across the board. In many companies, it has proved successful to have one person doing both jobs. Neither Mr Higgs nor the Government should override the wishes of shareholders. If the Government intend to legislate on that point, there should not be an absolute prohibition. That would be pretty awful.
In this country, we can congratulate ourselves on a regulatory regime that is better than most in the world of commerce—including, and especially, that of the United States, which has been the home of some recent major financial scandals. Of course, we have also had problems with companies such as Barings and Marconi. A sharp tug on the reins by a non-executive member might have prevented those difficulties from occurring. I refer not to the problem of fraud, but to things that have not been run properly.
It is regrettable that no amount of regulations, ethical standards or codes of professional conduct can prevent the consequences of greed, corruption, incompetence, folly and, in some cases, fraud. In the end, the best safeguards for companies' shareholders, workers and creditors, is the integrity and conscientiousness of those in the position of authority. There is nothing better than that—it is a very good thing.
My honourable friend Tim Yeo pointed out in another place thatany change to existing practice must he scrutinised for its effect on Britain's competitive position and whether it makes wealth creation easier or harder".—[Official Report, commons, 29/1/03; col. 884.]1374 Self-regulation should be the preferred option for professions such as accountancy.
The Secretary of State told my honourable friend that the new regime would not apply to the alternative investment market companies, and did not reply to his query about the regime's application to foreign companies listed in London. Surely, that is a loophole. Why is it thought that investors, workers and creditors of that kind of company are less deserving of protection?
We share the concerns of the CBI about the recommendation that shareholders should have the right to meet with the so-called senior non-executive director. If something is going wrong, the board should be involved at that level, not one individual senior director. The CBI thought that might he divisive in the board; I believe that it probably would, and I am not sure how it would help in the long term.
Higgs also made the suggestion that half the board should be non-existing—I mean, non-executive—directors. They had better exist, or we would really be in trouble. We do not believe that half the board is a practical proportion for the smallest of companies. We suggest that smaller companies would exclude companies outside the FTSE 350.
In conclusion, in common with other noble Lords, I thank the noble Lord, Lord Brennan, who introduced this important debate on the Higgs and Smith reports. We have had the opportunity to scrutinise and discuss them in a way in which Members in another place have not. As the noble Lord, Lord Razzall, said, we may not have reached agreement, but it justifies your Lordships' House as a democratic forum that we can discuss these matters.
Lastly, this country has a reputation for financial integrity and probity. Despite the occasional breaches by the odd rogue or villain, that makes us still an important world financial and commercial centre. We hope that the strengthening of controls as recommended in the Higgs report, without imposing impractical or impossible restrictions, will enhance our reputation and help to add to the wealth of the nation by encouraging investors and institutions to base themselves in our country.
My Lords, the noble Baroness, Lady Miller, referred to the noble Lord, Lord Borrie. He had intended to speak, but he is unwell.
§ 6.46 p.m.
§ The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville)
My Lords, I congratulate the noble Lord, Lord Brennan on initiating this timely debate. I agree that we should never forget the human consequences of the financial scandals that have occurred in recent years. I also agree with almost everything that he said about non-executive directors and board remuneration. I am pleased that the noble Lord, Lord Freeman, believes that our significant reforms have been "tough and measured". That is how we would like them to be seen, and it is important that they are seen in that light.
1375 The noble Lord, Lord Razzall, suggested that the House was totally split on this issue, but I disagree. There seems to be almost overwhelming support for what we are doing—with the exception of the noble Lord, Lord Marsh, who was in a small minority. However, that is where he is normally most happy, so I was not deeply worried about it.
We all recognise that sound corporate governance and reliable financial statements are vital for sustained investor and market confidence. There is no doubt that the failures in the United States shook that confidence severely, and continue to do so. The consequences of a lack of faith in our markets should not be underestimated. Lower share prices, higher costs of capital, lower investment and a more risk-averse attitude to innovation can all, to some extent if not totally, be traced back to the catastrophic collapses of Enron, WorldCom and Arthur Andersen.
I agree with the noble Baroness, Lady Cohen, that there are differences between UK and US accounting. As she said, the UK relies heavily on a principles approach and a true and fair view. That emphasises the substance of accounts over the form, which is a strength. The US relies much more on detailed rules, which tends to promote a different approach. However, it is wrong to be complacent about the UK's position. For example, the UK Auditing Practices Board recently warned about the dangers of aggressive earnings management in the UK. The problems with Enron and WorldCom may have been less likely to happen here than in America, but we cannot be certain. The Higgs report recommendations, and the other changes that we are making, will help to make such problems less likely to occur here.
We need to take a long hard look at corporate governance issues across the piece. The Co-ordinating Group on Audit and Accounting (CGAA) was established to ensure that auditing and accounting issues raised by the Enron collapse were addressed thoroughly by appropriate regulators. Separate reviews were taken forward by Derek Higgs on the role of non-executive directors and by Sir Robert Smith on audit committees, as well as a DTI review of regulation of the accountancy profession.
I listened carefully to all the points made about the various reports and reviews, and I shall address the specific points in due course. First, however, let me stress that the proposals need to be seen as a mutually supportive whole; they should not be judged in isolation.
Some of the proposed changes address the issues from a boardroom perspective, some from the perspective of the auditors, and some address the issue of oversight and regulation. The overall objective is to raise standards of corporate governance, strengthen our accountancy and audit professions and provide for a more effective system of regulation of those professions.
In her Statement to the House on 29th January, my right honourable friend the Secretary of State for Trade and Industry strongly welcomed the Higgs 1376 report and emphasised its importance. She highlighted Derek Higgs's conclusion that at least half the board, as well as the chairman at the time of appointment, should be independent; that all members of the audit and remuneration committees should be independent; and that the separate roles of chairman and chief executive should be reinforced. She also stressed how crucial she thought it was that appointments should be made on merit—not, as is the case for over half the appointments at present, through personal contacts and friendships.
However, my right honourable friend also stressed that that was not a regulatory approach. The way to raise corporate governance standards is to use the existing, very successful approach of the combined code guidance. The principle is "comply or explain", whereby a company—for example, a small listed company—that is unable or considers it inappropriate to comply with the recommendations can, as now, explain why it is not doing so. Its shareholders and the market will judge whether that explanation is a reasonable one.
Since publication of the Higgs report, we have seen plenty of media coverage about its implications. I agree with the noble Lord, Lord Brennan, that the CBI's response was disappointing. I am glad that the noble Lord, Lord Freeman, and the noble Viscount, Lord Chandos, were supportive of its overall approach. We are well aware of the responses to what I thought were very selective and biased questions from the CBI. Of course we note the concerns. However, the institutional investor community is supportive of the report, and many in business have supported the report's findings.
As the Secretary of State said, there is a strong belief that British corporate governance is the best in the world. The Government are committed to maintain that position, but we cannot afford to be complacent. The Secretary of State has already made clear to Parliament, and confirmed in her Mansion House speech, that the Government welcome the Higgs report. We think that it marks an important contribution to corporate governance and restoring investor confidence.
I am delighted to be able to give the noble Lord, Lord Barnett, an answer which he has not already given me. The recommended changes to the combined code are presently out for comment under the auspices of the FRC. It is the FRC that is responsible for the combined code, not the Government. The FRC has invited comments by 14th April on the proposed changes to the combined code before it issues a definitive revised code. I am sure that the FRC will consider all the comments it receives. The issues now need to be considered carefully and debated sensibly, and that is what the FRC will do.
I should add—I thought that there was no mystery about—this that the Treasury and the DTI were both very much involved in all the work, particularly in relation to the co-ordinating committee. The two departments worked very carefully on the matter, as we both have an interest in it. I think that joined-up 1377 government is a rare commodity and that, when we come across it, we should celebrate it and not consider it a demonstration of lack of clarity about responsibilities. I should also add that we are not considering legislation. We are working on the principle of "comply or explain". I am, however, not saying that we would never change that.
It is worth remembering that Derek Higgs publicly consulted last June. He saw and spoke to a great many players during the conduct of his work and took soundings with the major representative organisations on his proposals as well as doing detailed research, the results of which are available on the review website. I have stressed that the corporate governance improvements—not just Higgs. but also Sir Robert Smith's very important recommendations on the role of audit committees—are not about regulation or coercion, but rely on the very effective mechanism of "comply or explain". However, we must also recognise that Enron raises issues about "who guards the guards"—about the role of the auditor, the relationship between the professional accountancy bodies and the independent regulators, and about the enforcement of standards. That is why my right honourable friend announced in her Statement on 29th January a number of tough new measures to ensure independent oversight and auditor independence. Various issues have been raised concerning those measures and I shall attempt to address them in a moment.
First, I should like to set out the main changes that we have announced. There is to be a unified national body to oversee the accountancy profession—an expanded Financial Reporting Council, under Sir Bryan Nicholson—with three clear responsibilities: setting accounting and audit standards, enforcing or monitoring them and overseeing major accountancy bodies. That body will be more accountable and transparent. The setting of auditor independence standards by the Auditing Practices Board under this new structure, and a new unit for inspection of major audits, mean a tougher independent challenge of audit. Those roles will become clearly independent of the professional bodies.
The changes to the oversight regime, when combined with the recommendations of Sir Robert Smith's review, to which I have referred, will help safeguard auditor independence. Specifically, they will provide a clearer and stronger role for audit committees in approving the auditor and the purchase of non-audit services, backed up by stronger combined code provisions and detailed guidance, and tougher ethical standards for the audit profession. These standards are to be set by a fully independent body with independent monitoring and discipline. Finally, and importantly, we are toughening up enforcement of the accounting requirements through a new more proactive regime which will make more effective use of Financial Reporting Review Panel and FSA expertise.
I turn to some of the specific points raised. I very much agree with the noble Lord, Lord Haskel, about the need to widen the pool of non-executive directors and to deepen their involvement. Non-executive directors must not be seen simply as policemen; they 1378 must be seen as bringing valuable skills and knowledge to the board and to help rather than hinder the achievement of competitive advantage. Derek Higgs placed strategy at the top of the list—alongside performance, risk and people—as the main elements of the role of a non-executive director. He described the non-executive director's role as a constructive challenge and contribution to the development of strategy. Research commissioned for the review showed that there was no contradiction between the strategic and monitoring roles of the non-executive director.
I assure the noble Lord, Lord Freeman, that we will certainly continue to pursue with the SEC the point that it should take account of the excellent regulation in this country. There has been a recent visit to the United States and I think that we may be making some progress.
The noble Lord, Lord Freeman, also asked about the timing of the new company law Bill and how we will handle it. We will bring forward a Bill as soon as practicable. However, as I am sure he will appreciate, this is a task of great scale and complexity. We are considering having a pre-legislative committee as a useful device to help take forward that legislation. He was also right to say that the EU is proceeding on the very sensible basis of "one size does not fit all". We agree that that is the right approach.
The noble Lord, Lord Sharman, raised a number of points, including whether to allow the chairman to chair the nomination committee; the role of the senior non-executive directors in relation to investors—which I think is rightly described as the back stop approach in the Higgs report; and rotating the board of non-executive directors. I do not want to get into the detail of the specific proposals now because, as I said, they are being reviewed and consulted on by the FRC. However, I should like to clarify the position, not for the noble Lord, Lord Sharman, but possibly for other noble Lords. He was quite right to describe that approach as a backstop. It would operate only when communication between the chairman and the investors had essentially broken down and there was a lack of confidence. Only then is it envisaged that the senior non-executive director would take action. Such action seems very practical and not to be a threat to the chairman's overall role.
As regards the rotation of non-executive directors—the noble Lord, Lord Stewartby, also raised that point—Higgs says that there is a need to be flexible on that issue. He accepts that there will be cases where a non-executive director remains on a board for longer than six years and recommends that shareholders should be asked to re-elect non-executives each year after they have served for nine years. That seems an eminently practical approach.
The noble Baroness, Lady O'Cathain, asked whether the proposed changes would raise the performance of a board. If the changes prevent a few of the failures of corporate governance that we have seen in recent years, they will be worth while. The 1379 essence of regulation is that it should be proportionate. We believe that the proposed changes are proportionate to the seriousness of the issues involved.
The noble Baroness also asked what would happen if investors and a board were unhappy with a chairman. She suggested that they and the board should confront the chairman. In my experience that is not the way these things work. Having another channel of communication between board members, investors and the chairman may result in action being taken in circumstances where board members are not at all keen to tell the chairman that he should not be in charge of the board.
I agree with the noble Lord, Lord Holme, that companies need respect and trust if they are to operate effectively and recruit idealistic young people. The noble Lord, Lord Fyfe of Fairfield, mentioned the senior independent director. The detail of the Higgs report makes clear that that is a very limited role in particular circumstances.
The noble Lord, Lord Stewartby, may not have been selected at his golf club, but the record shows that half of non-executive directors are selected on a personal basis. It is interesting to note that only 4 per cent have a formal interview. Therefore, in general, the system is open to charges of cronyism, which is something we all want to avoid.
I agree with the noble Lord, Lord Marsh, that standards of corporate governance in the UK are certainly very much higher than they were in the past. However, it is a mistake to be complacent. The boards on which the noble Lord has sat may be comprised only of paragons of good sense and virtue. However, I think that the noble Lord, Lord Sharman, who has probably had experience of more companies than the rest of us put together, would agree with me that in the past many non-executive directors joined boards without being aware of all the activities or of the financial practices of the company that they joined.
I agree with the noble Lord, Lord Paul, that corporate governance rules will always struggle to control energetic and skilful entrepreneurs. However, government and investors must try to make certain that the rules are as good as they should be. We cannot rely on society providing a stream of individuals of great personal integrity, although we should in all areas try to stress the importance of personal integrity.
I agree with the noble Lord, Lord Williamson, that we should not see boards in terms of two blocks of executive and non-executive directors. But, equally, we should appreciate that they have different roles. I agree with him that it is crucial to have a strong link between remuneration and performance. That is why we introduced the remuneration regulations 2002.
The noble Lord, Lord Berkeley, mentioned the parallels between corporate governance and quangos. There are important similarities, but we should always remember that they are not exact. We should see what can be learnt from Higgs but not think that one can 1380 make exact comparisons. The existence or not of shareholders is an important difference here and one that cannot be ignored.
The noble Baroness, Lady Hayman, referred to the same issue. She mentioned some of the difficulties of applying the Higgs principles to the voluntary and public sectors. It is valuable to explore those issues, even if it is sometimes difficult to apply the principles to voluntary work.
The noble Lord, Lord Razzall, asked whether the National Audit Office could audit private companies. I do not think that the Government have any strong views on that issue. It is not a particularly important issue in terms of corporate governance one way or the other. I do not believe that we have considered the question of the imbalance of each shareholder carrying the same "weight" as regards certain decisions. Perhaps that is because that is not a very good idea. It seems to me that that is not an idea that commends itself immediately to many people.
I was surprised to note that the noble Baroness, Lady Miller of Hendon, appeared to move in two directions at the same time. Apparently, she wants a detailed timetable for the implementation of the regulatory changes but she does not want action to be taken too quickly. We have already begun to put the regulatory changes into practice. Some changes will be implemented quicker than others. I am sure the noble Baroness is not surprised to hear that the fact that Tesco left the report on the shelf does not move me strongly one way or the other.
In summing up, I welcome the debate. These are important issues and not easy ones. We may all agree as regards the overall objective, but, as the debate has shown, there is more than one way of achieving that objective. Of course, these are issues that are being grappled with around the world. The US has already made its response—a strong and immediate response—through the Sarbanes Oxley Act. The European Commission is taking forward work on both corporate governance and auditor independence—work which the UK is in a good position to influence and lead. Others such as Australia and Japan are also carrying out fundamental reviews.
If Enron has shown us anything, it is that these are truly global issues, not national ones. But I think it is fair to say that the UK's response has been widely recognised around the world as sensible and effective. It is neither knee-jerk and disproportionate, nor complacent and foot-dragging. It is tough where that is needed but measured and mature, building on our existing, well respected system of corporate governance. That is the basis on which we shall go forward.
§ 7.7 p.m.
§ Lord Brennan
My Lords, the continued vibrancy of British corporate life has been richly illustrated this evening by our finding out that the noble Viscount, Lord Chandos, and the noble Lord, Lord Marsh, manage to sit together on the same board. I thank 1381 them both for their contributions. I thank the noble Viscount, Lord Chandos, for making sharp satire appear merely delicately sardonic. I thank the noble Lord, Lord Marsh, for eventually being able to overcome his natural capacity for reserve.
I thank all other noble Lords who contributed to the debate, especially those who gave us what I call wisdom. I refer to the noble Lords, Lord Barnett, Lord Paul and Lord Haskel, on my side of the House, to the noble Baroness, Lady O'Cathain, and the noble Lord, Lord Stewartby, on the Conservative Benches, and to the noble Lord, Lord Holme, in particular on the Liberal Democrat Benches.
We can extract from the contributions three conclusions. First, we are in a process of consultation about something that is immensely important. It is not just a matter of avoiding another Enron situation but of ensuring competence in British corporate life. That requires a balanced debate about how to match commercial freedom with public protection. In making a balanced judgment we should surely apply good values. Finally, we should take action sooner rather than later. I commend the Government's expedition and the clarity of the exposition of the Government's views by my noble friend the Minister. I hope that we shall not discuss the subject again next year. I beg leave to withdraw the Motion.
§ Motion for Papers, by leave, withdrawn.