Companies (Miscellaneous Reporting) Regulations 2018 — House of Lords, 2018-07-09
Topic: Domestic Commerce
Sharon Bowles (Liberal Democrats, Centre to centre-left): Thank you. I notice that I am not the only one who had to run in. I declare my interests, as in the register, in particular as a non-executive director of London Stock Exchange plc. I welcome the provisions in these regulations and will speak mainly about the Section 172(1) report and stakeholder engagement Recent events surrounding BHS and Carillion have reminded us, yet again, that it is not just share- holders but the public purse, ordinary workers and pensioners that bear the brunt of corporate failures and misdemeanours. Incorporation and limited liability is a bargain with society, meant to encourage entrepreneurism and growth for the common good. The public-interest side of that bargain has to be upheld. That is the message from the Green Paper responses: 86% and 85% respectively of respondents agreed with steps to strengthen stakeholder voice and governance for private companies In fact, looking after the public interest has always been the majority view. I took the time a couple of years ago to go through the evidence in the Law Commission consultation leading up to the Companies Act 2006. It was a minority—a concerted one—who supported "one master, the shareholder", which then became "enlightened shareholder value". The majority wanted a more express public-interest requirement, but lost out as they were not co-ordinated around a single suggestion. So here we are again, just as with the creation of the strategic report, trying to fix it again I am not sure whether it counts as an interest, but I was the author of the Liberal Democrat response to the Government’s Green Paper, in which I put a long— 32 paragraph—section on interpretation and enforcement of Section 172 of the Companies Act 2006. It included a call for legislation to correct the distortion that has occurred in practice to the intentions of the so-called enlightened shareholder value and for the discharge of the duty in Section 172 to be susceptible to checking and challenge. That is a regulator’s job: they look after the public interest on behalf of the Government, and that matter needs some revision and upgrading for companies I doubt that all the deficiencies in Section 172 could be dealt with by secondary legislation, but these regulations are a decent attempt to remedy the fact that the "have regard to" formulation is weak, to the point of being non-existent. I sincerely hope that the 172(1) reporting proves, as I put it, "susceptible to checking and challenge", and that the perfunctory statements which, in effect, say "we thought about it and dismissed it" are not left unchallenged. I say this also with regard to the requirements in paragraph 13 of Part 3 regarding engagement with employees, suppliers, customers and others. These clarify that there must be not only an explanation of the engagement with employees and wider stakeholders, but statements explaining how directors have performed the "have regard to" requirements and a summary of the effect of that regard on principal decisions. These statements must not be allowed to say "no effect" without substantive reasoning—no getting away with the sort of simplistic, "we take the best person for the job" explanations that have been prevalent on gender equality In paragraph 9.2 of the Explanatory Notes, it says that the FRC has agreed to include guidance on how companies should make a Section 172(1) statement. The forthcoming revised corporate governance code will have a "comply or explain" requirement concerning the mechanism of employee engagement, choosing from the three options of a designated non-executive director, a formal employee advisory council or a director from the workforce. I have no problem with having options, and suggest that again, this has to be a "comply or say what you are doing instead that is just as effective" type of comply or explain, not a "we didn’t think it suited our business" type of explanation. Indeed, a weak explanation would seem to offend against the employee involvement provisions in Part 3 of these regulations.