My thanks to Sir Alec (Broers), Vice Chancellor, for that introduction.
Delighted to be here.
This morning I want to talk about
· Why company law is so important to our economy and why it needs to
modernise;
· What we should seek to achieve from the 21st Century company and how we
might get there.
But I shall start with the events of recent weeks.
Worldcom
Investor confidence in the US has been badly shaken by events at Enron and
WorldCom. The actions of a small number have had immense repercussions on the
whole business community. We know only too well the effects of scandals like
these. We had our fair share in the early 90s - Maxwell, Polly Peck, BCCI?
But action was taken.
Improvements were made to accounting and auditing standards; the regulation of
financial services business; the regulatory framework for auditing and
accounting standards; and the regulatory framework for auditors and
accountants.
And our system is the stronger for it. Which is not to mean we can relax. I am
not for one second complacent.
Of course the UK is not immune to what has gone on in America. In the global
economy, this is simply not a practical or realistic view to take. Stock
markets all around the world have been affected - although France and Germany
have suffered rather more than our own.
But I do think events at WorldCom and Enron show how our principles based
approach is preferable to rules based. Principles permit regulation to adapt
to a rapidly changing world in a way that is enormously difficult for a rules
based approach. Notable former proponents of rules are now coming out in
favour of principles.
So we must take action on the global stage to restore confidence.
In particular, we must press ahead with developing a full set of rigorous and
effective international standards and, in particular, ensuring that the
incentives built into remuneration packages encourage responsible behaviour.
Take share options.
Share options are an important form of pay - especially for high tech start
ups. And they are increasingly prevalent - particularly in the States. But the
concerns are that they dilute shareholder value, may incentivise irresponsible
behaviour - and they aren't properly being reflected in the balance sheet.
In a global economy, we need to take action on an issue like this on an
international basis. To take action just at domestic level would leave UK
business at a disadvantage in the interim. I very much welcome the fact that
these issues are on the IASB's work programme.
Sir David Tweedie indicated his intention to press on with them when he
appeared before the Treasury Select Committee earlier this week.
Domestically, Gordon Brown and I put together a group straight after Enron,
chaired by Melanie Johnson and Ruth Kelly, and bringing together the key
players - such as the Auditor General Sir John Bourn, Michael Foot from the
FSA, Mary Keegan from the Accounting Standards Board - to look at this. The
Group is pulling together a wide range of relevant work. We're due to receive
an interim report later this month. I challenge them to come up with proposals
that restore confidence.
Confidence has been lost in the independence of auditors as a result of Enron.
The relationship between the company and the auditor was blurred, to put the
point kindly. One way to tackle this may be through the rotation of audit
firms, or audit partners. But we should also look at the extent to which the
audit firm should also be able to supply non audit services to its audit
clients.
It would be wrong though to focus all our attention on these options. We
should not forget that in all of these cases it has been the directors who
have brought the companies down.
Corporate governance is key. An area where I think we are on the front foot -
but where we need to stay vigilant and look for continuous improvement. I have
asked Derek Higgs to conduct a review of the role of Non Executive Directors
and I look forward to hearing his thoughts.
Last week, my colleague Melanie Johnson laid regulations requiring increasing
transparency on directors pay for quoted companies - giving shareholders to
have the right to vote on it.
But we should also consider giving an enhanced role to the Audit Committee. I
know that this idea has been mooted before. It is one I find attractive. We
will think things through though, and take action where it is justified. The
last thing British business and society needs is an ill considered, hastily
rushed through knee jerk reaction.
But our approach must involve a mixture of action on both the international
and domestic stage. This is crucial in the global economy - where all our
economies are inter-dependent.
Globalisation and the pace of technological change presents challenges for
policy makers across the world.
There are those who argue that globalisation results in a diminishing role for
national Governments. I do not accept this. Government has a vital role to
play - in managing the consequences of change at home; but also by working
with other Governments internationally - as we are for instance on economic
reform in Europe; or in taking forward the Doha Agenda.
Government's Strategy
And look at what has been achieved by our Government. The first thing we did
on coming into office was deliver a macroeconomic framework that provided for
stability and growth in the UK.
We made a complete change in monetary policy. The UK is enjoying the longest
period of sustained low inflation since the 1960s; we have the lowest interest
rates for nearly forty years; and employment is at the highest rate ever. But
there is still a need for further action at home. Even with a strong and
increasingly open world economy during the 1990s, and a sound macroeconomy, UK
productivity has continued to lag behind that of other major economies.
For every £100 of production by an American worker - we produce £72. For
every £100 of production by a French worker - we produce £85.
If we achieved US levels of productivity, we would be creating an extra
£5,000 per worker, per year. So our priority is to close the productivity
gap. We know what drives productivity - investment, competition, enterprise,
innovation and skills.
And market frameworks play a key role in spurring each of these along. Our
role as Government is to get those market frameworks right. Both
internationally and domestically, so that they drive up productivity.
That is the context we are operating in. And company law is a key part of this
market framework.
The importance of Company Law
In 1911, Nicholas Murray Butler, the president of Columbia University, claimed
that the limited liability company outweighed even electricity as "the
greatest single discovery of modern times". If an invention is measured
by endurance, then after a hundred and fifty years, the limited liability
company is certainly not doing badly.
As John Monks has said
"Company Law provides the legal basis for one of the most important
institutions organising our economy".
Company law is central to our economy and our prosperity - for wealth creation
and social renewal. It can promote enterprise - or it can hold it back. It is
a vehicle for growth. A facilitating and enabling framework for all 1.5
million British companies. Company Law is also a key indicator of our national
competitiveness - weighed up by potential investors.
But Times Change
Our company law was largely created in the nineteenth century. But what was a
source of competitive advantage to us then, is now a source of competitive
disadvantage. The law has got out of date - and become encrusted with all
sorts of amendments and case law.
When I first spoke to the Review Team, after my appointment as Secretary of
State, I was startled at some of the examples they gave me of how complex and
convoluted company law had become.
Starting at the beginning - Subsection 1 of Section 1 of the Companies Act
1985 states "Any two or more persons ...may ...form an incorporated
company...".
Which seems clear enough. Until you skip down the page to subsection 3A of
Section 1 which states ":notwithstanding subsection 1, one person may
..form an incorporated company ..."
Another example - the main rules on accounts are set out in one part of the
Act with no indication that there is any simpler provision elsewhere for
smaller companies. It takes another 20 pages to find these.
Businesses with an accounting reference date of end September might think that
they had until end July to file their accounts - after all, the Act says they
have 10 months. But, no. Because there are only 30 days in September, they
only have until 30th July.
So there is a need to tidy up the law. But we also need to reflect the huge
change we have seen in our economy since Victorian times.
The 1862 Companies Act was developed for joint-stock companies to raise
capital for large projects, such as building railways - but today 98% of firms
registered at Companies House are small businesses.
Back then, Rowland Hill had just introduced the Penny Post. Now we've got
emails, the internet, text messaging, faxing, computerised book-keeping and so
on.
Company Law Review
It was on the back of this that Margaret Beckett launched the Company Law
Review in March 1998. At the time she made it clear that she wanted it to be,
and I quote from her speech, "an open and fully consultative
process".
I think it's been an extraordinary success. Whilst some have said it's taken
too long, I make no apologies. This was a huge task, with huge interests and
huge implications.
It was absolutely right it went into the detail it did.
I want to place on record my immense gratitude to all those who took part. The
team succeeded in its ambition.
Where from here
It is now Government's task to build on the findings of the Company Law
Review, published in July last year. To modernise the settlement between
business and society. And to make Britain the best place in the world to start
a business. The best place in the world to grow a business.
To achieve this, we need market confidence. So we need to promote responsible
business. And show off the responsible face of business - as a beacon to
others.
Because as with the original Companies Act, there can be no rights without
responsibilities; no advantage without accountabilities.
These are the aims I will be looking to achieve when we respond to the Company
Law Review's Paper - as we will do, with our own White Paper - very shortly. I
also hope we will be able to publish some of the legislation in draft in
tandem with this.
Regulation
In setting out our proposals, key will be the approach we take to regulation.
My aim, in drawing the line between enterprise and society, will be to ensure
that we only have necessary regulation - essential to promoting market
confidence - making it as easy as possible for businesses to start and grow.
Our starting point must be the small firm - "think small first" -
with additional or different provisions for larger companies where necessary.
Small firms are the engine of our economy. They employ 12 million people in
the UK - around 55% of the private sector workforce. And 3 times as many as
the FTSE 500.
Around 88% of all "novel innovators" (firms introducing a
technologically new or improved product to market) are SMEs.
And the cost of bad company legislation can have a huge impact on SMEs and the
wider economy.
An unnecessary burden of £100 a company a year costs our business sector
£150 million a year. So we need to look rigorously at regulation - and ensure
we only keep that regulation which is vital to market confidence.
Starting a business
So how do we apply this when it comes to starting a business? We're still one
of the best in Europe. In Italy, you need to go through more than a dozen
steps to form a company, taking anywhere up to 4 months.
In Britain, there are only three steps. You or I could form a company within
24 hours. This is good. But it could still be easier. The Review found ways to
simplify the law on company formation and capital maintenance without
jeapordising market confidence.
We could scrap the existing memoranda and articles of association - instead
placing the company's constitution in a single document.
The M&As have always struck me as a bit of a charade anyway. People can go
to a company formation agent and pay £100 for a document that they never look
at or refer to again.
What they need is a clear constitution. One they can understand. One which
doesn't unnecessarily constrain their activities. And objects clauses - as the
Review pointed out - can constrain companies from innovating and growing, and
have adverse effects on others.
The role of company secretaries was also highlighted. Large listed companies
will certainly need a company secretary with a high level of expertise and
training. A small company may not need one at all.
So should the law dictate a one size fits all rule? Is this crucial to market
confidence?
The other aspect that needs to be considered is the legal framework for
charities and the wider non-profit sector. These are under review - showing
Government's readiness to consider and consult on new ways of doing business.
As we did when we legislated to allow for Limited Liability Partnerships.
There are now 2,600 LLPs.
Growing a business
We also need to encourage businesses to grow - and innovate - and compete in
world markets. Business needs to look outwards to Europe.
Europe has played a major role in setting company law for over thirty years.
We strongly support, indeed have led, much of this work.
We will continue to contribute fully to European discussions on company law.
Not just on international accounting standards but also in the High Level
Group on European Company Law which Jonathan Rickford, and Jaap Winter, who
will be speaking later today, are both playing a role in.
This is just one part of a far wider European action plan. Real progress has
been made on lowering the cost of capital through reform of the financial
services industry. The Seville Summit reaffirmed member states' commitment to
complete the Financial Services Action Plan by 2005.
This is internationally. We also need to look at what we must have in place
domestically to ensure market confidence.
For instance all companies, even small companies, still have to hold an Annual
General Meeting every year.
For most they are an unnecessary formality. With little of substance ever
coming out of them.
Although the Companies Act 1989 made it possible to relinquish this obligation
- it added an unnecessary layer of bureaucracy. The onus was still on the
small business to opt out - not the other way round.
If small private companies want to have AGMs - fine - they can have them. But
should the law require them all to?
Directors Duties - another area highlighted by the Review. Obviously of
central importance. They build market confidence.
But, at the moment, directors duties are set out in 250 years of case law.
And, not surprisingly, the message isn't getting through. A 1999 survey of IoD
members found considerable confusion amongst directors - half of those
surveyed incorrectly thought they had an explicit duty to take into account
the interests of creditors and customers when considering actions on behalf of
their company. Some thought they had no duty to shareholders! Three quarters
thought that directors' duties were difficult to understand because of the
variety of legal sources involved.
We need to make directors duties clearer.
Responsible business
And also examine what directors duties should entail.
Though the basic objective of directors should surely be to promote the
success of the company for benefit of its members as a whole, it is plain good
business sense to look wider than this.
To grow, companies need to foster relationships to succeed with employees; and
suppliers and the customers for products or services. To have regard to the
impact of their operations on the community; on the environment. And to
maintain a reputation for high standards of business conduct.
This is responsible business practice - but we also need to improve the
quality of information available to create market confidence.
The Review proposed a step change in the way that larger companies report -
with the Operating and Financial Review.
For the directors to set out what they regard as material to an understanding
of the company. So users can form their own assessment of the company. Not
just about the past, but the present and the future. So that the company's
opportunities and risks are clear and transparent to its stakeholders.
Not just numbers, but whatever is relevant to that company - for example the
environment. Its customers. Its employees.
The right treatment of people - human capital - is a key driver for many
businesses. A company which loses its people can lose its value overnight.
Investors need to know this value, human capital, is secure - and is being
maximized in the same way as its other assets - its plant and machinery.
Denise Kingsmill put her finger on this issue in her report on women's
employment and pay.
I am setting up a group that will look at what best practice in human capital
reporting should look like and which companies are most likely to need to give
these reports. We will announce members of the group later this year.
And with the OFR we will make sure that small shareholders are able to
exercise their rights with the benefit of decent information.
Conclusions
To sum up, this is the most fundamental reform of company law for 150 years.
We are rewriting the settlement between business and society for the modern
economy.
This is not just an exercise in cutting red tape - although, given this is an
area of law which has been become encrusted over 100 odd years, I will be
disappointed if we don't achieve more than £150 million a year in savings to
small business.
It's about more than that. It's about responsible government creating the
right market framework for successful and responsible business. It's about the
relationship we need between the state and the market in the modern economy.
The Company Law Review has been a beacon of excellence in public policy
making. It has set the stage for one of the great law reforms - on a par with
Gladstone's reforms of the 19th Century.
When we will publish our White Paper - as we will do shortly - you will have
the opportunity to comment. To help create an environment where responsible
business can flourish. With the aim of prosperity for all.
And I look forward not only to hearing your comments this morning - but to
working with you in the future as we take this important work forward.
Thank you.
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