Ian McCartney - Former Minister of State for Competitiveness (May 1997 - Jun 1999)

Speech to the ICAEW

Chairman, Ladies and Gentlemen, I am delighted that the ICAEW have asked me to speak to today's conference about developments in company law. If I may, I will start by looking to the longer term, before speaking about some important reform proposals which the Government already has in hand.

So let me first bring you up to date on the Company Law Review.

I have been very encouraged by the warm response to the Review of the Companies Acts, which the DTI launched earlier this year. I know this view is fully shared by the independent Steering Group which is managing the Review.

The response showed wide support for a root and branch look at company law; and - I am pleased to say - great willingness on the part of a wide range of people to support the Steering Group in their task, in a number of practical ways.

I welcome the generous way in which many experts have already given their time and expertise to the process. I know Chris Swinson, for example, has been a valued member of both the Consultative Committee, and of the Working Group which is looking at the relationship between the bodies which regulate company law. I hope we will get more work out of him later.

I am today publishing on the Department's website a summary of the comments we received in response to the consultation document published in March. I would like to pick a number of key themes from this response, and to talk a little about the work which the Steering Group has in hand.

Let me first remind you why the Government launched this Review. You will remember that we called our March consultation document "Modern Company Law for a Competitive Economy". We wanted to create a regulatory framework that supports and encourages enterprise. That can cope with increasing globalisation; and ever faster technological change.

We have therefore set a framework of objectives with the central aim of promoting the growth and competitiveness of British business. We also want to enhance the accountability and transparency of companies. And we want to achieve a proper balance between company law and voluntary governance codes, and between the rights and responsibilities of participants.

And having achieved all these aims, we want to end up with a statute that users can actually read and understand. And one that keeps pace with change.

These are very clear objectives; but I should make it clear that the Government has no pre-conceived ideas about how they should be delivered. We have asked the Steering Group to bring forward proposals; and the Group's first public consultation will take place in the New Year, with the launch of a Strategic Framework Document. Let me pick out two or three likely themes.

Firstly, a strong message from the public response to the Review was that statute should clearly cater for companies and shareholders who want to use modern methods of communication. Intelligent use of electronic communications, for example, could save money for companies in the longer term, and allow shareholders easier access to the information they need to be more pro-active investors. It is clearly important to ensure that the law does not get in the way of what is technologically possible in these areas.

The Review has already come forward with some early proposals on this, and I am pleased to say that this is one area where there may be an early opportunity for clarification of the law.

You will have heard in The Queens Speech last week that the DTI plans to bring forward an Electronic Commerce Bill later this session. I am considering whether this Bill could also provide an opportunity for bringing the Companies Act 1985 into the "Internet Age".

I emphasise that we have reached no firm decisions on this. But proposals could include, for example, allowing the company to transmit by electronic means any document which the Act says it must send to its members - provided the shareholder agrees. This would, for example, include the company's report and accounts and the notice of company meetings.

In addition, companies could be allowed to place any document onto a web-site and - provided again that the shareholder had agreed - send only an electronic message that the information was there.

And one other potential change would be to make clear that companies could receive proxy voting instructions in electronic form. I stress that all these proposals would enable, not prescribe. It would be up to companies and shareholders to decide.

I think there is merit in looking positively at these "quick win" ideas from the Review's work on this subject. I hope we can find a way to progress them.

The Steering Group is also looking at the scope for using modern media to make more radical changes to the form of the annual general meeting; and it will consider further down the track what other reform is needed to make company meetings more relevant to companies and shareholders. Again, I do not yet know how much will be necessary in the way of radical reform, but I look forward to the outcome of this work. I would also welcome your further suggestions on how to make any other area of the law, "Internet friendly".

The response to the DTI proposal for a Review also confirmed the need for the statute to be made more accessible to small private companies. As you know, the vast majority of UK companies are small, and usually owner-managed. In today's knowledge-driven economy, it is clearly vital that statute should not get in the way of directors' understanding of their legal obligations. Or, indeed, of a clear understanding of what are the options for structuring new businesses.

The Steering Group have told me that they are considering whether there should be a separate statute for small firms, or whether Government should provide for the greatest possible simplification within a single statute. They are also looking at the choice of legal vehicle available to small companies.

Finally, there was general agreement in the public response that the so-called "stakeholder" issue lay at the heart of the Company Law Review. This issue means different things to different people, and there was no agreement, among those who have commented so far, on what might be the right approach,.

It almost goes without saying that a company cannot succeed unless it addresses the interests of all its constituencies - in its own long term interests and those of its shareholders. One priority for the Steering Group has been to look at whether company law should play a greater role in supporting this process.

The Steering Group has not yet finalised what it plans to say about this issue in the New Year. But it has started from a recognition that the current law is much more permissive than is sometimes realised in enabling directors to take an inclusive approach.

Issues under consideration include;

• the role of disclosure in the company's relationship with society at large;
• whether wider interests should be reflected in directors' legal duties to the company; and
• whether there is any relevance for UK companies in structural models adopted elsewhere, such as the two-tier board.

It is not yet clear whether there is a need to reform the law in these areas, but I do think the issues merit careful consideration. I know the Steering Group plans to expose all key options in its Strategic Consultation Document, and I hope its proposals will attract a wide response.

I re-iterate that the New Year strategic consultation document will represent the Steering Group's own views. They will expose the key issues in priority areas and discuss options and, where possible, preferred solutions. They will also indicate the areas to be addressed in the next phase of their work. I look forward to seeing what the document has to say. I would urge you all to give the Steering Group a considered response to their proposals and your formative views about the areas which they will be addressing next, when the document is published. The Steering Group - and the Government - want to hear the views of all those concerned. So you should not pass up this opportunity to help us get the solutions right.

That is all I wanted to pick out in the way of key themes from the response to the DTI's March consultation. There were other strong messages for the Review, and from today you will be able to read all about them on the DTI's website.

In preparing for the 1997 General Election, the Labour Party made two Business Manifesto commitments about the accountancy profession. The first was to ensure a framework of independent regulation for the accountancy profession. The second promised a review of the law on joint and several liability with an eye in particular to the position of accountants. This is perhaps a suitable occasion to take stock of what has happened in response to both these commitments.

Last year I elaborated on regulation, saying that the key criteria against which to judge this framework were "effectiveness, independence and transparency".

There is a legitimate and substantial public interest in ensuring that the activities of the accountancy profession are conducted effectively, and with integrity. The public is not always well placed to assess directly the quality of the professional services on offer. But it has a reasonable expectation that it can rely on the professional title. It is right that this should be so, and the profession must meet the challenge of public accountability. I am delighted, therefore, to be able to publish today the Government's proposals for a new framework of independent regulation of the profession.

This follows considerable effort - above all - I am the first to recognise - by the profession itself, but also by Government. The result is a framework which will cover all the activities of the accountancy profession. I believe that it can deliver public confidence, and that it provides a structure which has the flexibility to change as the requirements and activities both of the profession and of its clients evolve. It should be up and running in time for the Millennium.

The Government's proposals will, I believe, deliver an independent non-legislative approach. However, if it becomes clear that a move to a legislative regime is required, we shall have a structure to build upon. Although the profession has taken to heart the message that a strong dose of independence is essential, the Government believes that in some areas it is necessary to go further. Those changes are reflected in the consultation document, and I am pleased the profession is rising to the challenge. I am confident that the detailed arrangements contained in the consultation paper will introduce a robust and effective framework of regulation which will secure public accountability.

Underpinning the new framework is the Foundation. This is a group of five or six individuals which are likely to be nominated by the National Consumers' Council, the Bank of England, the Central Bank of Ireland, the London Stock Exchange, the Confederation of British Industry, the Institutional Shareholders' Committee and TUC. The nominees will be entirely independent of the profession. From this body flows the rest of the framework.

The Foundation will appoint individuals to four second-tier bodies. Three of these are re-structurings of familiar bodies:

• The Auditing Practices Board will be re-formed. It will continue to have responsibility for reviewing and developing auditing standards;
• A new Investigations and Discipline Board will replace the current Joint Disciplinary Scheme. This will deal with cases which raise issues of public concern. Unlike its predecessor, it will have the power to take on a case without referral from the professional bodies;
• An Ethics Standards Board will take over the remit of the Chartered Accountants Joint Ethics Committee, setting rules and issuing guidance on ethical standards.

The important point is that these bodies will have a majority of lay members. In practice this means that 60% of the members must be non-accountancy practitioners. This will ensure independence, while at the same time ensuring that the experience and technical expertise of the accountancy profession is not lost.

The fourth body represents the most radical departure - that is a Review Board. Its job will be to review not only the work of the other bodies, but also the work of the professional bodies themselves, and make recommendations for change. The bodies will have to accept and implement the recommendations of the Review Board unless there is a very good reason not to and the body is prepared to explain that in public. In the Review Board we have, therefore, a combined watchdog, and vehicle for change.

Of course, the acceptance or otherwise of the Board's recommendations will help to guide and inform the fundamental and independent review of the framework which will be held after five years.

While I am confident that these proposals can deliver effective, transparent and independent regulation, success or failure depend not only on the robustness of the structure but also on the commitment and skill of all those working within the structure.

Success also depends on the commitment of all the professional bodies involved to drive this forward. I believe that there is the will to make a success of this. The profession recognises that it needs to move forward in a positive way, and not to look back or to defend the status quo. That would undermine a profession which needs public and customer confidence at all times.

I am confident that the detailed arrangements contained in the consultation document I am publishing today will introduce a publicly accountable framework of regulation for the accountancy profession. I would like to stress, though, the value I place on the consultation process. I look forward to considering responses to the consultation document, not only from members of the profession, but also from those in the wider business community. I hope that those of you with an interest will find the time over the next two months to express your view on whether the proposed framework offers effectiveness, independence and transparency.

The second Business Manifesto commitment said that we would "review the laws on joint and several liability so that incorporation in this country provides accountants with adequate protection". On 17 September Peter Mandelson and I set out our response to this commitment. We said that the Government had concluded from a wider public interest perspective that no sufficient basis had been identified for a fundamental reform of the law affecting professional liability. We were, though, publishing a draft Bill on Limited Liability Partnerships for consultation.

The decision on joint and several liability followed careful consideration of work by the Law Commission, as well as discussions with the profession. While I do not want to go into the detail of the issue here, it was clear to me that no case was made which justified a change to the current position. In particular, I was concerned that any attempt to reduce exposure on the part of the profession - in situations where, it must be remembered, their negligence has already been proved - would leave the innocent party having to pick up the bill. This cannot be right.

That is not to say that we do not recognise the complexities of the relationship between auditors and their customers. Certainly, the Company Law Review will consider the issue of the relative responsibilities of directors, investors and auditors, and the profession has been invited to contribute to this debate.

In publishing the draft Bill and regulations on LLPs, we were responding to a widespread demand to keep the legal framework for business in the UK effective and up-to-date in order to enable UK business to be internationally competitive. It does not seem unreasonable that a business should be able to operate with limited liability without having to organise itself as a company, provided it has appropriate rights and obligations. The intention is that an LLP will have external obligations equivalent to those of a company but retain the internal flexibilities of a partnership.

The consultation period on the draft legislation has now closed. I know there were many positive responses, and many helpful comments and suggestions. I will be considering all the issues that have been raised in preparing the Bill for introduction. My hope is that it will find a place in this legislative session, and that we will soon have a valuable and welcome addition to the range of business entities available to UK firms.

Ladies and Gentlemen. I have welcomed this opportunity to bring you up to date on where we are with some of the important initiatives which are in hand in the area of company law. As I have said more than once today, the Government puts great store on a wide and constructive dialogue with all those with an interest in the regulatory framework. I look forward to this dialogue continuing.

Other speeches by Ian McCartney - Former Minister of State for Competitiveness (May 1997 - Jun 1999)

(the following are available from the archive)
• Launch of NMW Best Practice Materials (07/07/99)
• 'Institutional And Organisational Obstacles To Labour Market Participation' (05/07/99)
• Speech to the British Youth Council (23/06/99)
• "Stimulating Inward Investment within the North West" (17/06/99)
• Speech to Allied Distillers (04/06/99)
• Address to the AnUMan "Partnership in Practice" Conference. (27/01/99)
• Working Time Directive (26/10/98)
• Speech to the Communication Managers' Association Annual Conference (11/05/98)
• Post Office Review (24/11/97)
• GFTU Conference (12/05/97)