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The Rt. Hon. Patricia Hewitt100 Group Speech |
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I must start by thanking the 100 Group for inviting me here to speak. You represent the financial wing of Britain's top 100 businesses. Key creators of wealth in this country. So I'm delighted to have the opportunity to speak to you tonight. There are a good many issues I could speak to you about– the changes to the DTI; the Government's commitment to working with the private sector in the reform and modernisation of our public services. I'm sure our discussion afterwards will cover a lot of this ground - but I would like to spend the majority of my speech talking to you about the way the business community and accountancy profession has come under intense scrutiny following Enron and WorldCom. Enron and WorldCom have shown how the actions of a few can have immense repercussions on the many. Investor confidence – around the world – has been badly shaken. Investor confidence is fragile. Although these corporate failures were in the US, we're not immune from them. In the global economy, that's just not a realistic view to take. Stock exchanges around the world have fallen. Although we are faring rather better than some of our main competitors - the strength of our macroeconomic framework means our economic fundamentals remain strong. But it would be foolish to be complacent. A knock to investor confidence in the States is a knock to investor confidence here. This evening I want to talk about how we are working with a wide range of partners to restore this confidence. And why I am keen to ensure that any response from us is effective – of course – but also measured and proportionate. All in the context of the changes I have made to the DTI -and the need to raise productivity and improve competitiveness. Of course the way we respond to these scandals is governed by the complex and interlinked world in which we operate. In the global economy, our domestic economies are increasingly intertwined and interdependent. So some action will be taken on an international level. Some on a European level. Some on a national level. Some say globalisation means there is a diminishing role for national Governments. I don't accept this. In my ways, the contrary is the case. Government has a vital role to play – not only in managing the consequences of change at home; but also by working with other Government's internationally on global issues – as we are for instance on economic reform in Europe; or in securing free and fair trade around the world through the EU, and the WTO. Against this background, our key domestic priority in the first term, in response to the volatility of the global economy, was to create a macroeconomic framework that provided for stability and growth in the UK. And it was that stability that companies such as yours were telling us was the number one requirement for long term business success. As a result of these decisions, we are enjoying the longest period of sustained low inflation since the 1960s; the lowest interest rates for nearly forty years; and the highest levels of employment ever. International Competitiveness There are over 1¼ million more people in work than when we came to office. And around 75,000 more businesses. We have the 4th largest economy in the world – and remain the number 1 destination for foreign direction investment into Europe – attracting 21% of new projects, compared with 12% in France. The Economist Intelligence Unit ranked the UK the 4th best place in the world to do business. Having laid the foundations, the challenge of our second term is to raise productivity and improve competitiveness. And this has now been made the over-arching aim of my Department following the Review I held of my Department. Reform of the DTI And the Review is really progressing well. Today I held an "awayday" with my other Ministers… Market frameworks We're all focussed on raising productivity. We know what drives productivity – investment, competition, enterprise, innovation and skill. Market frameworks play a key role in spurring each of these along. The international and national market frameworks within which our businesses operate. And at the heart of our market frameworks are our systems of company law – the balance of duties and obligations between directors, shareholders and others - our tradition of timely, true and fair financial reporting – our corporate governance system – and our high standards of auditing and accounting. They play a crucial role in sustaining market confidence – building investor confidence – attracting investment to business. And, as I said earlier, investor confidence has been badly shaken by events at Enron and WorldCom. 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; the regulatory framework for auditing and accounting standards; and the regulatory framework for auditors and accountants. And our system is the stronger for it. But I won't be complacent. It may be more difficult for an Enron style scandal to happen here but it is not impossible. We must remain vigilant And this is how we need to respond to it. With a mixture of action on the international stage together with action at a domestic level. International Action There is international consensus about the primary objective – ensuring another Enron or WorldCom doesn't happen. The UK is at the forefront of ensuring that the international community's response is effective, measured and proportionate. IASB I said in a speech at Cambridge's Faculty of Law earlier this year that we need to press ahead with developing a full set of rigorous and effective international accounting standards which are accepted globally. This will have major advantages for our international companies. It should reduce the burdens you all have in providing the additional information needed for your companies' securities to be traded in some other markets. We also want to promote transparency and encourage responsible behavior. The move to global standards should increase investors' confidence and help reduce the cost of capital. I am delighted that Sir David Tweedie at the IASB has taken this work so far forward – not least on share options forward. I understand he expects to publish an international exposure draft in November. A few months ago, this would have had US companies rushing to Congress in protest. But the argument is shifting. Now leading American companies like Coca Cola are rightly treating employee share options as an expense. IMF scrutiny The IMF and World Bank are also playing their role - establishing a new financial architecture. The Chancellor recently announced the UK would put itself forward for assessment by them against internationally agreed standards – on accounting, auditing, corporate governance practices and insolvency. By putting ourselves forward for this, we are giving support to the IMF and World Bank as they establish new financial standards - and are sending an important message out to other countries, particularly developing countries, about the importance of peer review. Europe The European Union has also been very active. I am pleased that the UK has been very much to the fore in this work. The new European Regulation, requiring listed companies in Europe to comply with international accounting standards, is coming into effect from 2005. We're currently consulting on whether we should extend this to a wider range of companies in the UK. Your views, both as a group and as individual companies, will be welcome. Europe is also looking at the corporate governance agenda. Last week, Melanie Johnson went to the Competitiveness Council and agreed with her Ministerial counterparts that an action plan should be prepared for taking this work forward. Careful judgement is needed in considering which issues justify or require action at EU level, and which are best handled in Member States. I assure you that we are at the heart of these discussions. And also Europe should resist the temptation to rush into legislative "solutions" without fully exploring the alternatives first. And we want and expect the European response to Enron to be measured and proportionate – as our own approach in the UK has been. Sarbanes/Oxley So a lot of work is going on internationally. And this work has been effective I think because of the way it has been carried out in a measured and proportionate way – in a spirit of co-operation and partnership – clearly thought through with a timetable for delivery. There is always a risk, in situations like this, we could resort to kneejerk reactions. I am concerned that the recently passed Sarbanes-Oxley Act in the US could be an example of legislating in haste, repenting at leisure. We all understand why the US legislators and Administration wanted to lay down a strong message about corporate propriety to its business community. But there was already a lot of work going on. In the US, the EU and here in the UK. And we were all looking at the same sorts of issues – how to ensure company financial statements are true and fair, how to ensure audit firms are independent of the firms they audit, how to strengthen the role of the Audit Committee, how to oversee the audit and accountancy profession. And the way the Act has come out – it gives the impression, in places, of simply having been drafted too quickly, with no consultation, and with apparently little thought to the international dimension. It is true that there are some powers in the Act to exempt foreign audit firms from some of the oversight requirements, but as yet we have no indication from the US whether, and how, these powers are going to be used. Those parts of the Act have not been implemented yet and the Oversight Board itself has not yet been established. This is not a question of special pleading for UK companies and audit firms. In principle, there is no reason why a non US firm which wants to have a US listing shouldn't be treated in exactly the same way as US ones. If a UK firm wants to list in New York, they must play by American rules. But, as ever, it is not that simple. We have our own equivalent regime, both for the governance of the listed companies themselves and for the accountancy firms that audit their accounts. It is simply good practical common sense to recognise that fact, rather than subject business to duplication of regulatory requirements. It is burdensome and costly, and in places there may be actual conflicts between the two sets of requirements (for example in the way that an Audit Committee should be constituted). The Devil is in the detail. And we do not yet know what that detail will look like – as the US have yet to implement these parts of the Act. It may be that the US will take a very flexible approach, utilising the exemptions in the Act. In which case, there should be little to concern UK firms. That is certainly our objective. And that is why we are pressing the US hard, both on our own account – and at the European level through the Commission. There are encouraging signs that they are listening but the coming months are important and we will be taking every opportunity to make our case. For example, Melanie Johnson will be talking to Harvey Pitt (Head of the SEC) shortly about our concerns. Domestic Action Domestically, we are certainly not resting on our laurels. But we are ensuring that we consult and consider all the issues fully before rushing into any hasty decisions. I make no apology for that – it is often the difference between good regulation and bad regulation. HMT/DTI Group After Enron, Gordon Brown and I put together a Group, chaired by Melanie Johnson and Ruth Kelly and comprising members of the profession, to look at our regulatory regime. We received their interim report just before the Summer break. The report contained a number of recommendations for additional work in different areas. We've made good progress on a number of these already. I'm particularly pleased with the positive and constructive way that the profession has responded. For instance, they are already updating their guidance to require audit partners to rotate every five years – rather than seven as they do at present. Meanwhile, the Financial Reporting Council is looking at how the Combined Code can be strengthened to enhance the role of audit committees. The Financial Reporting Review Panel are bringing forward proposals for introducing a pro-active element to their enforcement work. And the Review Board and the Ethics Standards Board are looking at the important question of the extent to which an auditor should be able to provide non-audit services to its clients. The Group's final report, pulling all these strands together, will be published in January. Consultation document on the profession There is another important aspect which I have not yet mentioned. The Group also recommended there should be an early review of the regulatory arrangements put in place with the Accountancy Foundation. I am delighted to be able to announce tonight we are publishing a consultation document on this. Taking forward this key recommendation of the Group. This review gives us an opportunity to review, strengthen and simplify our system. It doesn't imply that there is a widescale problem in our overall regulatory regime, or that we've forgotten the wide changes that have already been introduced in the last decade or so. Our response will be measured and proportionate. It will be carried out in co-operation and partnership. We have an open mind on the issues in the consultation. For example, we want to look at whether we have got the regulatory remit right. Should the Accountancy Foundation focus on the company auditor or – as now – cover the regulation of accountants in general. Second, the regulatory functions and who owns them. Should the professions continue to set ethical standards and monitor their members' work – or is there a case for stronger independent intervention in these areas? Thirdly, whether the structure of the Accountancy Foundation is right or could be changed to make it more effective. Your views on all this will be very welcome. My officials will be going out and talking to everyone about the issues. To make sure we get it right. It's an important consultation. Important for the profession. Important for business. Important to the integrity of our markets. We hope you will feed in your views. Modernising Company Law I want this consultation, as far as possible, to replicate the success of the Company Law Review. I was really pleased with the reaction that our July White Paper received. Company Law is a key enabler of enterprise. It is an important building block for competitiveness. And the White Paper was warmly welcomed by business groups, employee groups and consumer groups alike. Due in large part due to the open, consultative and inclusive way that we handled the policy process. . We intend to do likewise. But we do need your input. You are all important players in this context. I look forward to seeing your views on the White Paper proposals. Company law reform is long overdue. I am proud that this Government has taken up the challenge. We are committed to modernising the framework to ensure that it is fit for the new century, and that it promotes enterprise and competitiveness. Corporate Governance One issue which emerged from the final report of the Company Law Review, is the role and effectiveness of non-executive directors. Derek Higgs, a most respected business leader – who I'm sure many of you will know - is currently undertaking a review of this. I know that this review has prompted much interest and debate in the business community. And I look forward to receiving his report around the turn of the year. To conclude, I believe our accounting, auditing, corporate governance practices and insolvency system to be among the best, if not the best, in the world. But we aren't complacent. Enron and WorldCom have prompted us to take a close look at our frameworks – both internationally and domestically – and we will do this in a spirit of partnership and co-operation. Making sure that our response is measured and proportionate. You play a crucial role in driving British competitiveness and I look forward to continuing to work with you – making sure our markets are strong; making sure we close the productivity gap; working to promote and spread prosperity and opportunity for all. Thank you. I'd now be delighted to take any questions. |
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Other speeches by The Rt. Hon. Patricia Hewitt
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