Jacqui Smith MP

Institute of Company Secretaries and Administrators Conference

Today's event is particularly important. It is the people in this room that are at the regulatory coalface. You will have to put into practice the changes that we are developing. It is vital that we get your input so that together, we get it right.

Our objective is clear. To create the best corporate framework in the world. There are nearly 2 million companies registered in Britain today. From local tradesmen to multinationals. Everyone in the UK interacts with those companies in some way, every single day. Companies are being formed at a record rate. Over 27,000 new companies a month last year. And the population of companies has been rising at 6% a year over the last five years. So our regime must have something to commend it. We want to build on that success and have a company law that is second to none.

We know that if we get company law right it can help enterprise flourish. And encourage investment and wealth creation. Got wrong it can stifle them. Company law underpins the economy. A modern, accessible and streamlined regime will help us to create our vision of a productive and prosperous society in which we can all share.

There are three main strands to our corporate reform agenda:

• Boosting confidence in markets following a series of corporate scandals in the US;
• Comprehensive modernisation, building on the independent review; and
• Working with our international partners particularly in the EU.

I will focus on the first two this afternoon. But before I do, I want to make it clear I am not ignoring overseas developments. They play an increasingly important role in shaping British company law.

For example, from 2005 we will have international accounting standards. And we are working with the European Commission to ensure that its proposals on company law and the statutory audit contribute to the improvement of corporate culture across the EU.

There are other areas of change on the horizon. Ken Rushton has filled you in on the review of the UK listing rules.

And I am sure you are aware of the work we have been doing to introduce greater transparency and accountability into directors' pay. The latest round of consultation - on rewards for failure - has just closed. The responses have been numerous and thoughtful. We are grateful for your comments. ICSA's response argues that best practice is preferable to legislation. And that recent legislative and best practice changes should be given more time to work before further measures are taken. We will be mulling over all the views expressed and hope to make an announcement before Christmas.

Let me turn now to how we sustain market confidence. Business had been badly shaken by a series of scandals, of which Enron and WorldCom are the most obvious. It would be tempting to think this couldn't happen here. But we have seen apparently sound British businesses such as Equitable Life and Marconi plunged into crisis in different ways.

Karl Barnickol has already talked to you about Sarbanes Oxley. This is not the place for a debate about the merits of the American and the British approaches. But we acted quickly after Enron. We did not panic. We reviewed corporate governance and company law, in a measured and inclusive way. We consulted. We listened to experts. Indeed we asked experts such as Derek Higgs and Sir Robert Smith to lead some of the work. We took an evolutionary, not a revolutionary approach. I think most people believe that our system is basically sound, but not perfect and we are not complacent.

We identified a package of measures that would strengthen governance, accounting and audit.

Most did not need primary legislation:

• Changes to the Combined Code - and ICSA made a particular contribution on the good practice guidance that was produced with it
  
• Agreement by audit firms to rotate the lead partner more often
  
• Creating a unified and streamlined regulatory structure by giving the Financial Reporting Council the functions of the Accountancy Foundation

But some of the proposed improvements to the regime do need changes to the law. We want to deliver the post-Enron package as quickly as possible. We therefore intend to introduce a Bill to do this as soon as Parliamentary time allows.

This would do a limited number of related things:

• Ensure that auditors are subject to independent monitoring and disciplinary arrangements. And that the accountancy bodies granting qualifications and supervising auditors are subject to oversight by an independent regulator. Giving users of accounts greater confidence in audit supervision.
  
• Require companies to give a breakdown of payments to auditors for non-audit work. Allowing users to spot potential conflicts of interest.
  
• Allow the Financial Reporting Review Panel to require information from companies. The Panel would also gain the power to look at companies' interim statements.
  
• Allow the Inland Revenue to alert the Panel if it comes across accounts that may breach accounting requirements. At the moment, even if the Revenue discovers accounting malpractice, it cannot tell the Panel. All these measures will support the Panel's move to proactive enforcement of high standards of accounting.
  
• It would strengthen auditors' powers to obtain information when auditing companies; and
  
• It would strengthen the ability of company investigators and inspectors to obtain information about suspected malpractice.

The post-Enron reviews have shown us that these steps are necessary and urgent and we are determined to take them. In addition, the Bill would create a new form of company, a new vehicle for social enterprises - the community interest company.

In applying entrepreneurial drive for a social purpose, social enterprises can bring excluded groups into the labour market and raise skills and employability. Many operate in areas where economic activity and job creation are particularly needed. We are committed to helping this part of the economy.

Enterprises like Bulky Bob's in Liverpool that provides jobs and training for unemployed people collecting, refurbishing and recycling household goods, many of which are then sold at a discount to people on benefits. There is a triple benefit: job creation, reduction of waste and help for the needy.

We will also implement the statutory Operating and Financial Review - or OFR. Some companies already prepare an OFR. We believe the time is right to make this a statutory requirement for large companies. It will provide better information for assessing the performance of companies. It will place greater emphasis on forward-looking information, particularly on the risks and uncertainties a company faces. By making directors assess and report on their companies' prospects thoroughly and openly, the OFR will improve governance and contribute to restoring confidence in companies.

We plan to consult on draft regulations to implement the OFR as soon as we can.

These measures will complete our overhaul of the regime in the light of Enron and similar events. It is a carefully considered, balanced and full response. It will significantly improve the quality of information provided to financial markets. ICSA and its members have contributed greatly and the measures we have put forward are better because of it.

I'm aware that you have written to me on the difficult issue of the inspection and copying of company registers. I will be responding soon. I know that you would like the issue to be included in this Bill. I have to say that I would much prefer to deal with it under the new company law framework. But I will give your letter very careful consideration before I respond.

That brings me on to our plans for the comprehensive reform of company law. Let me start by setting out our vision of what the company law of the future should look like. Many lawyers and academic experts have and will play a role in our reforms. However, in the end the proof of success will not be whether the law is elegantly drafted, but whether our reforms will make it simpler and better to set up and run business here and whether our company law will feed into our overall objective of creating prosperity for all.

As Patricia Hewitt wrote recently "'The businesses that are the most successful are those that create long-term value - whose founders and directors are most admired - and not those that merely pursue short - term profit. Instead they are passionate about the quality of what they produce; honest and fair in their dealings with consumers, employees and suppliers; and careful with their reputation."

Let me be clear. Companies exist to create value for their shareholders. But they do not live in a vacuum and need to take a wide view of what is in the interests of the shareholders. They should look to the long as well as the short term. And they should take account of relevant factors such as their employees and the environment.

And doing so enhances profitability and sustainability. Across the board. Companies that take a narrow short-term view do not build for the long term. They do not value their employees - who eventually walk out of the door. They don't value their customers - who move to their competitors.

Companies that take a longer term and broader perspective will benefit themselves and help sustain increased productivity and prosperity for the UK as a whole.

The essence of our new vision for a company's regime is finding the right balance between social responsibility and business enterprise.

We also want to promote constructive shareholder engagement. At this year's company AGMs we saw some significant displays of shareholder activism. Some institutional investors made their voting record public. Voting levels continue to rise, but there is still room for improvement. And all shareholders need to have confidence in the voting process. So I am very pleased to hear about the moves - in which ICSA has played a key role - to improve the voting process.

Our project to reform company law has a long history, starting with the independent review that kicked off in 1998. ICSA has been closely involved from the start and I know the review Steering Group was extremely grateful for its input.

Following the review, we set out our initial response and outlined plans for legislation in the Modernising Company Law White Paper we published in July 2002.

Since the White Paper there has been a good deal of hard work and progress.

We found that the more we looked at the structure on which we hoped to build the findings of the review, the more we realised we needed to go back and rebuild the foundations themselves. Not surprising, as the foundations date back to the mid nineteenth century.

The more we looked at the existing law, the more we realised that the key concepts did not fit what we now wanted the law to do.

This means that the process of turning the review conclusions into a new Bill is even more massive - and will take longer - than we initially thought.

But though it is taking longer, the benefits will be greater. We want the new law to be simpler and more accessible. No more of the sort of nonsense of section 1 of the 1985 Act. This tells you first that you need two or three people to be able to form a company. But then tells you three sub-sections later that you only need one person to form most types of company. We want it to provide a coherent and clear framework. And to last for generations of businesses to come.

A number of those who commented on the draft clauses in the White Paper said they couldn't give a view until they had seen how the thing hung together as a whole. We have taken this message on board.

As we have always said, we will publish the Bill in draft for comment. But we will do it as a single exercise. Meanwhile we look forward to continuing to work with ICSA and others in developing the proposals.

What will the Bill contain? Let me touch on just a few of the highlights. They will be familiar to readers of the White Paper.

In future the law will be on a "think small first" basis. This means that it will be written from the point of view of the small private company, with additional measures for larger and public companies. This turns the current law on its head - putting a light touch approach at the centre - but it will be a great improvement.

We need to ensure that the new framework provides stability with flexibility. It will need to be able to be up-dated simply and easily so it can meet the changing demands of the market and accommodate the impact of new EU directives.

The design and drafting of the new bill will need to be crafted to ensure its accessibility. The complexity of the current law is widely recognised and was one of the major drivers of the independent review. The new law needs to be readable and understandable by those who run companies.

Finally, the new law needs to have a strong deregulatory flavour. The aim is a light-touch, simple regime. With the minimum necessary for each particular type of company. Sweeping away obsolete and out-dated regulation. The outcome should be a better framework for all companies - both small private and large public companies.

We recognise that not all our proposals will be welcomed by everyone. I know that ICSA would like to retain the requirement for private companies to have a company secretary. Removing it does not mean that we do not value company secretaries. We realise they play an important role in ensuring good governance. But we must recognise that the needs of small companies are not the same as those of larger ones.

I do believe however that there is as an opportunity here for the profession to demonstrate the added value it can offer to even the smallest company. Companies make rational economic choices. If employing a professional secretary makes business sense, they will do it. But it should be their choice, not a requirement of the law.

So, where do we go from here? We are aware of the concern at the delay in turning the recommendations of the review into a new Companies Bill.

But it takes time to get things right and it is more important that we have the right legislation than having it quickly.
Let me re-confirm the Government's commitment to reforming company law.

I can't tell you now exactly when the Bill will be published in draft. But when it is you will see that it amounts to comprehensive reform. And will provide a modern, streamlined and flexible framework for business in the 21st Century.

So there is a lot happening. And on a number of fronts. Some of it high level and some of it incredibly detailed and complex. We are grateful for the valuable input that ICSA and professional secretaries are making across the whole range of this work. I look forward to answering your questions and to working with you to ensure that our company law reforms in the sort and long term achieve our shared objective to make Britain the best place to set up and do business and build our prosperity as a nation.