Rt. Hon. Margaret Beckett - Former Secretary of State for Trade and Industry (May 1997 - Jul 1998)

The PIRC Annual Conference

Introduction

Ladies and Gentlemen thank you for your invitation to join you today to talk about corporate governance and company law. Can I first thank our hosts. PIRC's views are perhaps not invariably be popular in all boardrooms - but their real and long-standing commitment to raising standards of corporate governance is not in doubt.

In what I have said since May about the pursuit of competitiveness - and in the papers so far produced under the heading of Competitiveness UK - I have set out three pillars that underpin my approach.

First, strong markets - hence, for example, our Competition Bill.

Second, modern companies - companies need to have an inclusive approach to their customers, products, people. Government has a role to play in setting decent standards as in, for example, our introduction of the National Minimum Wage Bill.

Third, building an enterprising nation, by promoting innovation and encouraging the spread of benchmarking and the pursuit of best practice.

But today I want to talk about some other aspects of my vision of the modern company, to set out some of what I expect of companies and shareholders in the drive for higher standards of governance; and to discuss the proper role of government in supporting that drive. It is against this background that I am also today publishing my proposals for a major review of company law.

The Vision

Our companies find themselves in an increasingly competitive, globalised marketplace. Companies that once operated only in local markets now sell to the world and face world-wide competition in their own markets. Their customers make ever greater demands for higher quality or better service. The pace of innovation accelerates as new ideas abound in the marketplace, in companies and in universities - ideas that are backed by the massive resources of world-wide capital markets.

In such a world only modern competitive companies survive and prosper. My vision of such companies is based to a large extent on what you, the business community, have told me in recent months and years. Successful firms, whether large or small, are those in which the Board, the shareholders and the employees have a common purpose because they each know that their long term wealth, health and happiness depend on the long term stability, growth and prosperity of their company.

What distinguishes these companies?

Their leaders have a clear vision that inspires the whole company to exceed their customers' expectations. Take Merck's vision "To improve and preserve human life" or Sony's "To experience the joy of advancing and applying technology for the benefit of the public". Aren't these aims rather more inspiring and more likely to end in greater customer, shareholder and employee satisfaction than merely "To enhance shareholder value". I'm not sure that many get out of bed in the morning for that?

Such companies also work with all their employees to unlock the full potential of each. In a world of rapid decisions and change, successful companies place a high premium on initiative being taken at all levels. The barriers to team-working come down. Employees develop specific skills and are introduced to a learning culture that enhances their employability. Rewards are shared, through employee share ownership and in other ways.

Modern companies work too in vibrant supply chains, actively helping their suppliers to improve performance, anticipating and contributing to innovation at all stages of the chain, not just their own.

The role of the institutional investor

And the modern company is open with its investors, building on their expertise, particularly in relation to investment decisions. Through such transparency and high quality dialogue the modern company builds a long-term relationship with its shareholders, enabling them to promote long-term strategies for the profitable growth of the business, rather than just short-term policies for higher dividends.

It is worth remembering that a higher proportion of British shares are now held by institutional funds than in any other country, although these shares are largely held on behalf of individuals, as members of pensions funds and holders of insurance policies.

This puts a particular onus on institutions and trustees to promote a transparent relationship with the modern company.

Of course there needs to be regular, informed contact between companies and institutions on strategy, performance and quality of management. That is not in doubt. And there has been a move towards more open voting polices among major institutions. But I believe that institutions and trustees should also show active stewardship of their investments by making positive use of their voting rights, and by being prepared to show the people who put up the funds what their voting records are. Trustees should also consider whether the way they assess fund managers is consistent with long term performance.

Cadbury said as far back as 1992 that institutions should, wherever possible, register their votes. Hampel reiterates this. I strongly agree. But the results so far are disappointing. As Hampel says, the last five years have seen no significant rise in shares actually voted, which remains at less than 40 per cent. Indeed, research by PIRC itself suggests the rise has been only some 2 per cent.

If then we are to judge how much progress we are making by the promotion of such advice I look for example to shareholders to make 1998 the first year in which there is a step change in the way they exercise their stewardship. I look forward to more institutions actively using their voting assets, and to pension fund trustees, and other clients, routinely asking managers how they have voted . Better still, institutions should explain their voting policies and volunteer to their clients the information on how they have voted.

Some who doubt that advice and exhortation will promote sufficient change have suggested to me that a degree of statutory enforcement would help to kick start best practice in this area. For example, they suggest that pension funds should be required to vote as a matter of fiduciary duty, as US private pension funds are required to do, although others argue that requiring institutions to vote could be inconsistent with voting in a considered way.

But for the moment my focus is on trends and developments. The modern company I believe demands the positive engagement of its shareholders, and I shall be interested to watch how they choose to exercise this role, in particular to what degree they seem to look to the long term.

Responsibilities to the wider community

Modern companies work not only with their investors, but with the community at large, so that their products, services and investments secure wide endorsement - whether this means for their commercial value or for their environmental impact. That is not just good for the community, it's good for the business and for loyalty and commitment throughout the company.

It is no longer unusual to emphasise that a good company should address the interests of all its constituencies in this way. People making a contribution to the company be it of capital, labour or some other form of expertise, are working together for common profit. The modern company - indeed any company - relies on all its wider relationships to make its products, sell its goods and to exist in society.

Some have argued that asking the board to consider those wider relationships may sometimes conflict with shareholder interests. But - with Hampel - I believe companies can pursue long-term shareholder value successfully, only by developing and sustaining those relationships. In the long run, the interests are the same. It should be difficult, when looking at the well run, modern company to know whether its managers favour the shareholder or stakeholder philosophy.

So I would like companies to think more deeply about how they can be transparent and accountable to all those with an interest in their business. One way may be for companies to look at improving how they communicate with all those groups in all kinds of ways - including in the annual report. I was interested to see that, on Monday, The Centre for Tomorrow's Company published a report on ways to make company reports more accessible and inclusive.

There is also a role for Government to play by reviewing the precise nature of directors' legal duty under company law to act in the interests of the shareholders. The key issue is that directors should not feel constrained from taking a broad view of their responsibilities because they are advised that the law requires them to take a narrow view. I do not yet claim that there is a clear need for the Government to reform the law but the issues certainly merit proper consideration.

Board pay

It should go without saying that the modern company encourages and rewards performance. That is part and parcel of building the partnerships that are essential to its long term prosperity.

In building these partnerships, the modern company needs to get right its policies for board pay. That is central to the standing of our companies, and the issue is one of trust. Trust requires shareholders and employees to understand the incentives under which the board is operating, and to accept that they are fair.

I want success to be well rewarded . But it brings the whole system into disrepute if companies fail to have regard to wider issues - such as the very real impact on workforce morale if they see what they judge as quite unwarranted pay increases at the top.

I also share the concern expressed by PIRC and others that board pay policies should be linked to more rigorous criteria relating to longer term performance; and linked in a way that is transparent to shareholders and employees. It is widely acknowledged that far too often incentive plans are based on performance criteria that are too soft, or are not easily understood except by the experts who devised them.

The best practice framework is already there. The modern company is one that uses it as a positive, not a defensive, tool.

There are already detailed rules for listed companies on disclosure on pay, and on performance pay policies. Companies are indeed observing those rules, but not always in a way which positively informs shareholders and employees, or responds to their concerns.

Greenbury recommends that companies consider each year whether to put the report of the remuneration committee to the vote; and Hampel reiterates it. It is a good principle; and one which would lead shareholders to expect that boards would seek agreement to pay policies, from time to time, perhaps where there had been earlier signals of shareholder concern. But so far, there is not so much evidence of boards actually doing it.

So the question may arise, are best practice principles enough? Clearly, not everyone thinks so. Since Hampel published their interim report last August, there have been more calls - not less - for shareholders to have the right to vote on the remuneration report.

I do not rule this out. Nor do I rule out requiring more informative disclosure on performance; or requiring directors to stand for re-election every year - so shareholders can comment on the performance of remuneration committee members.

Many companies would argue that prescription is unnecessary. And so it should be. So I look forward to early evidence of companies choosing to put forward the report of the remuneration committee to shareholders, for their endorsement. And I look forward to shareholders taking up the opportunity to comment and to vote.

I also look forward to companies providing better quality information - not simply quantity - on directors' pay. In other words, I want to see companies complying with the spirit of the Greenbury recommendations, as well as the letter of the Listing Rules. This may mean spelling out how performance is measured or how the company has performed over time compared with other companies; rather than simply asserting in the most general terms that their policy is to pay competitive packages that are sufficient to attract, retain and motivate.

Shareholders should be able to judge for themselves whether the remuneration committee has been successful in linking rewards to performance; if they can't, companies have failed to respond adequately to Greenbury's fundamental principles of accountability and transparency.

Accountability, transparency, growth and investment are at the heart of the modern company - and I know I share that vision with many others.

With many in this audience.

With the organisations that have joined the Tomorrow's Company initiative.

With the thousands of companies that have signed up for Investors In People, the fastest ever growing management standard.

With all those who have looked seriously into the issues, from Cadbury and Greenbury to Hampel and Myners.

With those who have studied company development such as John Kay and Charles Handy.

All of these people and organisations see that there is a quiet revolution happening in the best companies. A revolution that is as fundamental as Henry Ford's first production line. As Charles Handy says, business leaders have stopped "trying to herd cats". Instead they are giving their people the freedom to exploit their talents.

Modern companies are fundamental to UK competitiveness, and I want to see modern companies in every part of the British economy. The performance of such companies underpins prosperity, but it also enhances the quality of life of their employees through their experience of work rather than just through the way they spend their pay.

The issues on which I have touched are part of the good governance practices which the modern company needs to develop. Boards, shareholders, employees and others each have their role to play in this. The roles differ, but it is essential to get them right.

There are those who would say that the government has a responsibility to legislate for good corporate governance. However, while the legal system can be used to enforce aspects of best practice, I believe that the very best will adopt even better practice because they see its value, and will do so more readily of their own accord than if it is forced on them. That is why I would prefer to see many of the recommendations I have referred to embedded in good practice rather than needing to be enshrined in legislation.

You have heard Sir Clive Thompson set out the conclusions of the Hampel report. Let me say now how grateful I have been for the time that members of this distinguished committee have devoted - and continue to devote - to this issue.

But Hampel is not the end of the story, as I know they would agree. Hampel has proposed a governance structure for business; and the Stock Exchange are working on a combined code. It is now for companies and institutions to show leadership in delivering best practice on the basis of that structure and the code.

I intend to work closely with business to help them bring this about.

My Department will work closely with the Stock Exchange in their development of the combined Hampel, Greenbury and Cadbury code.

We will also encourage wider adoption of the Myners Group recommendations. I welcome Hampel's endorsement of what Myners has to say about best practice for company management, institutions and trustees, and on improving their quality of dialogue and encouraging longer term investment and development. We will therefore consider with Myners, CISCO and others how these ideas can be adapted for the smaller listed company.

I will work with the Chancellor to encourage greater and more effective innovation and R&D. In this context, I want companies to consider how they could improve the quality of their reporting on this and other intangibles in annual reports.

And we are already working with the CBI to follow up their Fit for the Future report: a campaign designed to spread best practice in all aspects of company performance throughout British business. I will consider what guidance to include on good governance, to help spread the best practice message to smaller companies.

All these steps are designed to enhance the competitiveness of UK companies. The White Paper on Competitiveness which I will publish in the Autumn will provide a first opportunity to take stock of progress. That will allow us to get a better view as to whether, as I hope, we are beginning to see voluntary moves towards best practice.

Major review of company law

But I also want to ensure that we can set a proper balance between company law and the voluntary approach for the longer term.

When I launched the Competitiveness UK initiative last summer I made clear that it was founded on a partnership in which Government and business each fulfilled complementary roles, each meeting their own responsibilities but also working together to find new ways to achieve the shared goal of improved competitiveness.

There is no doubt that company law is an area where the Government's role is paramount. We set the rules by which every company must operate - how companies are to structure themselves; the proper duties of directors; the rights and the obligations of shareholders; what rules are necessary to protect creditors; and what companies must do to communicate with their shareholders.

The Issues

Our current framework of law is largely based on foundations put in place by the Victorians in the middle of the last Century. They are foundations which have helped to deliver business prosperity for 150 years - the basic principles of limited liability and disclosure have stood the test of time. But in other respects, company law has become seriously out of date.

One problem is that it has been subject to piecemeal reform over many years. It has become increasingly bulky and no attempt has been made to review the basic structure. Another is that the language of the Companies Act is difficult for businesspeople, especially those in SMEs, to understand; and its rules are inclined to be too detailed and too regulatory. Too much of it is designed to stop the problems of the past happening again rather than to lay solid foundations for future developments such as the use of modern technology. There is now an urgent need to make sure the regulatory framework can support the modern company.

So I am publishing today a consultation document - Modern Company Law For A Competitive Economy - which sets out my proposals for a long-term review of company law.

Many of you will be aware that we intend to bring forward legislation on Limited Liability partnerships as soon as Parliamentary time allows. It may also be possible to bring forward proposals on other issues where business has been pressing for more urgent change - such as rules on financial assistance for share purchase and share buybacks; but I can as yet make no promises about legislative sessions to come.

My overall objective, though, is to establish a legal framework that ensures global companies see Britain as the place to base their business in the 21st century; and which gives small business the framework it needs for growth and enterprise. I want the review to consider straightforward, cost-effective and fair regulation which results in a balance of obligations, protections and responsibilities that are suitable for the modern age. And I want it to deliver a framework which promotes consistency, predictability and transparency; which underpins high standards of company behaviour and corporate governance; and which above all enhances the competitiveness of British business in a new millennium.

The process

I hope a great many people will take time to contribute their thoughts to a full and proper review. I can assure you that I intend an open and fully consultative process.

There will be an expert Steering Group, responsible for ensuring that the outcome of the review is clear, straightforward and workable. It will be chaired by my Department and will have a distinguished membership of senior lawyers, other expert advisers and representatives of business large and small. It will be supported by an externally appointed project director.

I am also pleased to say that both the Law Commission and the Scottish Law Commission will play an active part in the project.

There will also be a broadly based Consultative Committee, to ensure active representation of all wider interests. I hope that a wide range of experts - representing employees, shareholders and others, as well as companies and the professions - will find time to take part.

Consultation will continue with the publication of the report of a first, expert working group around the end of this year, and will continue throughout the process. The review will be thorough and I envisage that it will probably take about three years. I expect to publish my proposals for reform before the end of this Parliament. My intention is that, by early in the new century, the UK will have a modern company law framework that will support competitive business at the leading edge.

All this is set out in greater detail in today's consultation document. I urge you all to read it. But much more important I urge you to contribute your views.

Peroration

The vision which I have described today - the new ethos for the modern company - is one which is central to our nation's prosperity.

Competitiveness is at the heart of this Government's agenda because of the impact that it can have on all our lives. Company law and corporate governance together can make a real contribution to competitiveness and to the quality of all our lives, particularly our working lives.

I will work with all of you to create the right framework for Britain's future - for the future and well being of us all.

Other speeches by Rt. Hon. Margaret Beckett - Former Secretary of State for Trade and Industry (May 1997 - Jul 1998)

(the following are available from the archive)
• Seminar "Preparing Businesses for the euro" (05/05/98)
• The Engineering Council's Annual Conference (30/04/98)
• G8 Energy Ministerial Conference (01/04/98)
• CBI Annual Conference (11/11/97)
• CBI Launch of the National Manufacturing Council Report (23/09/97)
• Competitiveness Summit (23/07/97)
• "UTILITIES 2000" Conference (30/06/97)
• Competitiveness UK (04/06/97)