Businesses: Rights and Responsibilities — House of Lords, 2016-12-08
Topic: Domestic Commerce
Sharon Bowles (Liberal Democrats, Centre to centre-left): My Lords, I declare my interests in the register, in particular as a director of the London Stock Exchange plc. I too thank the noble Lord, Lord Hodgson of Astley Abbotts, for securing this debate. I have much in common with his thoughts and those of previous speakers We tend to look at the responsibilities of companies and corporate governance when there is a crisis or failure. The financial crisis made us look at banks, and we found that it was difficult if not impossible for regulators and prosecutors to bring charges against those at the top, and so the senior managers regime and reckless misconduct was invented. As the noble Baroness, Lady Bottomley, said, there have been scandals with other types of companies, and each time new rules are made: after Coloroll and Polly Peck to have more financial reporting and align executive incentives with those of shareholders; after Maxwell to protect pension funds, although we now seem to be having problems with BHS; and we had measures to stop corporate tax avoidance, health and safety rules, environmental rules, and so on. Alas, all too often the rules come after the event The UK’s principles-based regulation is often claimed as a strength, that principles can be relaxed for proportionality and strengthened if the principle rather than the letter is breached. I have severe doubt as to whether the latter, strengthened, is ever the case, because it comes back to the high hurdles to prove deliberate intent, and we always bow to calls for legal certainty Rights and responsibilities are spoken of as going together, but that is far from comprehensive in company law. We have lost connection with the origins of limited liability. Nowadays it is presented as a bargain between a company and creditors, but I suggest, not without historical justification, that the bargain is between company and society, where individuals—through the rights of incorporation and limited liability—do not to have to face ruin or fear of ruin for failure on the basis that it releases a more entrepreneurial spirit which, in today’s parlance, creates jobs and growth. In other words, it was for the general benefit of society However, that cannot be the end of the bargain with society. It was not originally. I will not go through the history, because conveniently, Andrew Haldane of the Bank of England gave a speech in May 2015 entitled "Who owns a company?", which did some of that. He traced the path through early incorporation to limited liability, in which the concept of protecting the public good was no stranger. One can take the view that a large part of looking after the public good is taken up by government—and that was used in the company law review process to argue against giving directors pluralist duties. However, as we have experienced, both piecemeal laws and overarching rights of action have repeatedly been found wanting, and public trust is lost Surely this is where principle applies. Like others looking at the issues, I concluded that directors should be given a duty of care, or, to put it another way, a duty to protect the common good. That would have a good home in the first part of Section 172 of the Companies Act 2006, ranking alongside and equal with the shareholder interest. Experience has shown that egregious events can and do take place, which fly under the radar of board surveillance and for which there is no accountability. It simply was not on the agenda. Indeed, "not on the agenda" is not only a problem but is also the defence of directors, even where there may be lines to prosecute This brings us to the matter of who at present can hold the directors of a company to account. The answer is, basically, the company. The duties of directors specified in Sections 171 to 177 of the Companies Act 2006 are owed by the director to the company. There is no general line of action for third parties or the state. It is therefore hard to see the board taking action against itself for collective ignorance Individual shareholders can apply to the court to make a derivative claim, now codified in Sections 260 to 269 in Part 11 of the Companies Act, but in the recent fourth edition of the textbook Company Law by Professor Brenda Hannigan, the conclusion is expressed that, "the mere introduction of the statutory derivative claim has not dramatically increased the risk of litigation to Directors, nor indeed significantly enhanced the protection of shareholders" It seems that the law is still marked "Could do better", and so we should Of course, shareholders have the ultimate sanction of selling their shares or collectively sacking the board, but the truth is that financial metrics, share value and dividends remain the primary driver. With bonuses and incentives linking executive performance to pay, those financial metrics are amplified, with the end result that profit is paramount when looked at from every direction So would putting protection of the common good into Section 172 do anything? I believe that it would, because the "primacy of shareholders" is a theme that permeates board discussions and professional advice to boards from lawyers, auditors and others. As many commentators note, it became more explicit and hardwired as a result of the 2006 Act, which has made matters worse, not better With a "protecting the common good" addition, some wider due diligence would be required which would at times influence advice, discussion and, critically, the agenda. In other words, it is fundamental to culture. It is not a matter of a plurality of masters; it is a question of balance: promote the company; protect the common good—responsibility in return for society, giving the right to incorporation and limited liability Protecting the common good could also be incorporated into the strategic report under Section 414A. Both there and elsewhere, regulators should be able to penalise successive inadequate reports, not just non-reporting, giving more attention, among other things, to the other stakeholders—the "also-rans" in Section 172. There would be a strong synergy between a duty to protect the common good and having a director to represent the public interest. Indeed, without a common-good duty, such a director may well struggle to have effect against shareholder primacy, both in argument and in law It does matter who is round the boardroom table when the substantive discussion takes place and the decision is taken. This bears on worker representation too and is at the heart of the need for diversity on boards and executive committees. It also extends into the benefits of other company formations, such as mutuals. Many very fine and commercial directors, essential to driving a company’s business, do not have the same awareness and antennae as those who have been involved in other walks of life, and therefore they do not challenge in the same way. Other and more diverse voices are still needed Besides the change to duty and what I consider to be its influence on culture, there need to be better enforcement possibilities, at least for the state. I have already mentioned the derivative actions, but the general law provision that we have, both criminal and civil—not to act so as to cause harm to others—requires proof of intentional wrongdoing. Ignorance is bliss, as the saying goes. We cannot go on filling in after the event, missing those who should have been held responsible at the time. That is society’s risk against company reward, and it feeds into the discontent about executive pay that no manner of linking to financial metrics can abate So alongside revisions on executive pay and better stewardship, in order to cope with egregious events it is high time to have an investigation into how to provide better state, investor and third-party enforcement action against directors and top executives for a failure of duty. These things would be incremental changes to what we have and would not be a case of throwing out the baby with the bath-water. However, I think that quite a lot can be put under question 14 of the Green Paper under "Anything else".