The Rt. Hon. Patricia Hewitt, Secretary of State for Trade and Industry, Cabinet Minister for Women

Joint IOD/ABI Conference

The investment community is vital to our economy.

We have the largest investment industry in Europe; the third largest in the world.

360,000 people work in our investment industry; that is a third of all those who work in financial services jobs.

The investment industry manages over a trillion pounds; and pays out £240 million a day in pension and life assurance benefits.

So I’m delighted to be here. Let me thank you all for the enormous contribution you make to British prosperity.

Last year, when I spoke at the ABI’s annual conference, I challenged investors to use the revised Combined Code as a platform for driving up long term shareholder value. I was delighted with the response this received. In particular, I would like to thank ABI and the IOD for their help.

Today I want to talk again about the relationship between companies and their shareholders. I want to focus on the next steps we should take to strengthen governance across the city. And how we use this governance to create the sort of companies and the sort of economy we want in the 21st century.

Corporate relationships are very complex. As companies, shareholders, auditors, directors, trade unions, NGOs and Ministers - we all invest time in making our business relationships work.

When they do, no-one notices… Yet when it goes wrong, the whole world sees. WorldCom, Enron, Parmalat… Time and again, we’ve seen how the actions of a few, damage the reputation of the many.

For us in Government, we know the majority of companies are well run. So our approach will remain measured and proportionate, We won’t resort to kneejerk reactions.

Our relationship with the business community is vital. We know that without economic success there can be no social justice; without a thriving City, there can be no jobs - no wealth to invest in better public services.

That’s why, over the last few years, we’ve set out to build a partnership between Government, business, the investment community and trade unions.

With the lowest inflation in thirty years, the lowest interest rates in forty years and the highest employment ever, I think we can be fairly pleased with what we’ve achieved.

We used to be the first into recession and the last out. Now, our growth is amongst the most stable in the G7. And we’re going through the longest period of uninterrupted growth since the industrial revolution.

But we can’t rest on this. The economic map of the world is being completely redrawn.

We’re no longer competing just with the G7… But with

India – who will have more IT graduates than us by next year;
China – set to be the largest economy in the world in a generation; and;
the new accession countries who have just joined the European Union.

Plus, we have new communication tools spreading new ideas and products around the world almost instantaneously; whilst new technologies are reducing product lifecycles in some industries to just a year or two.

Meaning new opportunities, but new challenges as well.

The kind of economies that will succeed in this changing world are those that excel in science and innovation; that act as magnets for successful businesses; the economies that are comfortable with global diversity.

And the businesses that will succeed in this changing world are the businesses that are innovative, flexible and that operate with the consent of those around them: their customers, employees, suppliers and stakeholders.

We have many of these businesses already.

They are the businesses that create a workplace partnership, where everyone can contribute to their success. Businesses that are passionate about the quality of what they produce and honest and fair in their dealings with others. Businesses that are careful with their reputation – at home and abroad.

The businesses that succeed will also need the best directors.

The best directors get big rewards for big success. But equally, they know they don’t get big rewards for big failure. And they don’t mind opening themselves and their companies to proper checks and balances - from their board, their auditors and their owners.

Strong governance from the company’s owners is a vital way of ensuring successful businesses and successful directors.

The vast majority of shares in our listed companies are owned by insurance funds, pensions schemes and collective investment trusts. They hold these funds on behalf of the beneficial owners – which by and large means us, the public.

The best of these fund holders do take their governance role seriously. They use their role to build long term value and competitive advantage within companies.

They ensure the company has the right mix of Directors and the right chairman. They regularly assess the management and leadership of the business. They keep the business strategy on track. They look beyond quarterly returns to look the boardrooms in the eye.

And, if they’re not happy with what they find, they don’t just pull the plug and move their investment somewhere else. Instead, they press for change and reform.

For most companies, this shouldn’t be and isn’t a problem. They appreciate the value their shareholders can offer and use it to inform corporate strategy and direction. In turn, most shareholders recognise that the Board is likely to have greater knowledge of the company’s operations, so they don’t try to micromanage the business.

It’s vital for all of us that these relationships work well. Our markets depend on trust and confidence, our companies depend on investment.

For us in Government, we know we won’t make these relationships work well by intervening or imposing solutions in an unreasonable or irresponsible sort of way. The days of “big stick Government” are long gone.

We know that the best way of achieving change is to use our powers as facilitators: empowering others; working in partnership to spread transparency and accountability.

This has been our approach since we came into office.

As we look back over the last few years:

We acted on executive pay. Not by dictating pay levels, but by giving shareholders more power and more information.

We acted to improve the function of non executive directors and audit committees. Not with hasty new legislation, but by bringing in Sir Derek Higgs and Sir Robert Smith to look at whether improvements were needed. The new Combined Code makes it much clearer what is expected from our boardrooms.

We reviewed our audit and accounting regulation. Not in isolation, but in partnership with the professions. The Companies Bill currently before Parliament will make important changes in these areas.

And we’re continuing to take forward work on the very important company law review. We will legislate as soon as Parliamentary time allows.

The partnership approach has worked. And that’s why it will remain at the heart of what we do as we move forward.

And, looking ahead, there are three areas I want to highlight where work is ongoing.

First, the issue of directors’ liability - the topic of today’s conference.

As I’m sure your discussions are showing, this is a difficult area where there are no easy answers.

Some people say that the level of liability faced by directors is putting some people off becoming directors, restricting the talent pool. Others say that a cap would limit the ability of the courts to hold negligent directors to account.

As George Cox has said, we need to find a solution under which a director’s potential liability is “stiff, but not life-destroying”.

We are currently weighing up the arguments carefully and will announce our conclusions to Parliament in due course. I know that you would prefer the right decision to a quick decision.

Second, we’re looking at how we promote greater transparency by our institutional investors.

Over the last year, we’ve seen many more examples of shareholder activism: Disney, GSK, Tesco, Vodafone, Sainsburys, ITV. And research from the Investment Management Association has also shown clearly that fund managers are spending more time with companies.

This is very encouraging. But one of the best ways of promoting greater involvement is by demanding greater transparency. We need to look at how institutional investors convey their voting record to the ultimate owners of the business - the public.

I welcomed Paul Myners’ recent report for the Shareholder Voting Working Group. His recommendations echoed many from our own company law review.

We agree that institutional investors should be required to disclose how they have voted their shares. Although, I understand there are some practical difficulties associated with implementing this through company law.

We are giving detailed consideration to Paul and his group’s excellent work. We will set out our position in due course.

The third area we’re looking at is how we promote greater transparency by our companies.

The best companies already know they should be open with those they deal with. That’s why six in ten listed companies provide the sort of information required in an Operating and Financial Review. They do so because they know their investors use them, value them and rely on them.

The OFR gives investors a clear window into a company and tells the story of the business in a straightforward way. It sets out the strategy. It can also describe the company’s approach to its employees, its suppliers, the environment and the community.

I want to build on this success – by raising the standard of the rest to the standard of the best. Today I can announce that we’re putting the OFR on a statutory footing for quoted companies.

Good companies will use the OFR to tell their investors about their employment practices, community policies and environmental performance.

Companies with bad practices won’t be able to hide it. So the message is, if you can’t defend it, you’d better amend it.

The OFR will increase confidence, promote trust and raise standards by all our businesses. And it won’t just be useful for investors. It will also be useful for employees, customers and environmental groups.

We’ve made sure that the burden of the OFR is as minimal as possible,

Rosemary Radcliffe’s group has produced some excellent guidance – which I have asked the ASB to take this forward as they develop an OFR standard.

And Denise Kingsmill’s Accounting for People report will help companies ensure that their OFRs reflect the links between people management and business success.

I can also announce today that, in parallel with the OFR, we are also implementing amendments to the directors' report, following the EU Modernisation Directive. Doing the two together will avoid duplication and minimise the burdens on business.

Let me conclude by saying that this partnership we are developing - between business, the investment community, government – is vital.

We’ll continue to act within this partnership – spreading transparency, confidence and trust. Because it is through this, that we can spread prosperity and opportunity for all.