Department of Trade and Industry

Rt. Hon. Stephen Byers - Former Secretary of State for Trade and Industry (Dec 1998 - Jun 2001)

TUC/IPPR seminar on corporate governance


Wednesday, June 07, 2000

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I welcome the opportunity to make a contribution to the debate on corporate governance. I want to approach this in terms of a real debate on a whole range of issues which need to be considered.

As you know, we have established a Company Law Review group, independent from Government, which has published a number of reports and will produce its final report in March next year. This has begun a significant and important debate.

I would like to make a contribution to that debate today, looking at the significant issues on corporate governance. But I want to rule out some of the more extreme options some are suggesting. And to indicate the direction the Government feels the debate needs to move.

I am not in favour of the status quo and I'd like to indicate some of the changes I believe are needed.

The reason this debate is important is that the way that companies are allowed to operate defines the nature of the market economy that we live in.

The key to shaping the market in ways that achieve our twin objectives of efficiency and social justice lie in the framework of rules within which companies do business and make a profit. So company law and corporate governance are at the heart of our debate about the kind of society we want and the nature of our economy.

We engage in this debate in many areas. When I was at the WTO ministerial conference in Seattle we strove to ensure that the world trade system gave proper recognition to international labour standards and environmental rules so that liberalised trade could benefit all our people.

And the soon to be concluded regulation on the OECD multinational guidelines continues the aim of setting standards for business.

The reality is that corporate governance raises significant issues that touch on the lives of most people.

In the narrow sense, corporate governance is principally about the relationship between management and shareholders. But that's looking at it in its narrowest sense.

Estimates suggest there are around 12 million private shareholders in the UK.

But corporate governance affects everyone with a pension or a savings plan - 70% of shares are now held by institutions, investing on behalf of their members.

And the way companies are governed also affects those who work for them. Decisions taken by companies affect customers, creditors, the environment and the wider community in which the companies concerned operate.

That's why good corporate governance is about helping firms to be responsive to changing economic demands but also to be accountable for what they do.

Corporate governance is about how companies treat their workforce. How they have an impact on the environment. How they help the wider community. Their impact on the developing world.

These are increasingly issues of concern for many people.

And they are increasingly issues which business itself cares about.

Because in the modern economy, company reputation can be one of its most important assets.

Today I want to look at the emerging findings of the Company Law Review, particularly in relation to disclosure and directors' duties.

The Review is an immense task. I have been impressed by the work that's gone into the Review so far. I want the Review to be part of the debate and not the final word in this important area.

Corporate governance is one of the key issues in the Review. I believe corporate governance is likely to be a key issue in the next Parliament, because it is central to building a Britain of enterprise and opportunity.

I also believe that the time is right for radical reform of our company law.

The main principles of our company law date back to Victorian times.

The last major review of company law was forty years ago.

That is why we began the fundamental review which is currently underway.

Quite simply, the current state of company law does not reflect the modern economy.

It is complex where it doesn't need to be.

It limits the use of information technology in company administration.

It also applies the same burden on all companies whatever their size. I fully share the Company Law Review's belief that we must end this through a 'think small first' approach.

These are important areas where we need to reform company law to provide a clear, simple framework for modern companies.

The publication of the Economist Intelligence Unit's UK Country Forecast today confirms that the UK is the second most attractive business location in the world. The UK's overall business environment rankings score has increased for the 2000 - 2004 period, compared to 1995 - 1999.

I believe that a clear, simple company law framework should be part of that business environment. We need to modernise the legal framework to maintain our competitive position.

Corporate governance lies at the very heart of the debate on company law.

One important aspect of corporate governance is the system by which large companies are controlled and directed.

The work of Cadbury, Greenbury and Hampel has provided a firm basis for this - most recently through the Combined Code.

I believe that in general the issues dealt with under the Code are more suitable for best practice than legislation. Best practice is more flexible, enabling companies to fit their own particular circumstances. It can be updated more easily.

The Code is held in high regard, both here and overseas. One of the main reasons for its success is that it has wide support from both directors and shareholders.

I believe that it is essential that the Code continues to have such support. That's why I'm pleased that the Financial Reporting Council has agreed to take responsibility for monitoring corporate governance developments and for recommending, where appropriate, amendments to the Code.

This Government has made clear that we do not intend to replace the use of best practice by legal rules in this area, provided best practice is seen to be working.

But we have also recognised that there may be a need for legislation in certain areas which are not covered by the new Code, or where experience shows that some legal underpinning is needed.

Two such areas are being considered by the Company Law Review and have been subject to their recent consultation papers: the duties of Directors and improvements in company reporting.

I do not intend to pre-empt the final recommendations of the Review. It is an independent review.

I can say that the current legal framework of directors' duties will have to change.

At present directors have a duty to act in the interest of the company. This leads directors to define their basic duty in the narrowest sense - based on the short term interests of shareholders.

Many would welcome clarification that the law would allow wider, long-term considerations to be taken into account.

This narrow view of the law may have made more sense in the past - when the shares in many companies were held by a relatively few private individuals.

But the world has changed. Our company law framework needs to reflect this. Today 70% of shares are held by institutions, and only 30% are held by private individuals.

The largest block of shares is held by pension funds.

This gives rise to something of a paradox. Companies are run in the interests of their shareholders. But the majority of shares are actually held on behalf of a large proportion of the population who, through savings or pensions are looking for long term returns and are looking for those companies to take a wider responsibility. And yet companies have to be run in a narrow interest for short term motives.

Companies need flexibility to enable them to look at the wider interests of the company and to consider the longer term interests of investors.

They also increasingly face pressures from a variety of sources for greater accountability.

There is a growing demand for transparency.

Non-governmental organisations and lobby groups are becoming more effective, and more widely supported, in voicing social and environmental concerns.

Consumers are increasingly using their spending power to support ethical concerns.

In the labour market, workers increasingly want to, and are able to, work for those employers with the best employment practices.

And the realisation that it is not the role of Government to run industry means that business increasingly has to take responsibility for its own actions.

Companies must take their wider responsibilities seriously. But what does that mean for the law as it affects companies?

The advocates of the pure stakeholder approach come in a number of different forms and want a variety of changes to the law to meet their particular agenda.

Some want a complete re-write of directors' duties - to require directors to act in favour of one, or a range of different stakeholder groups. They advocate a requirement to consider a specific set of interests - such as the environment, social or ethical considerations or a company's relations with its workforce - in isolation from a company's other concerns.

Others want board membership extended to include workers and other stakeholder interests, the right for stakeholder representatives to attend and advise at board meetings or even the adoption of a two-tier board structure.

Some want to grant directors the power to block a takeover or merger, if it affects some employees or suppliers, even when this runs counter to the long-term interests of the company and its employees.

And some want these measures to cover all companies no matter how big or small.

That extended list is not part of this Government's agenda. I want to make that clear - in order to ensure a constructive debate on the way forward.

I don't want people to focus on the wide stakeholder approach, when it is an agenda which is not going to be delivered.

I believe the way forward is to look at disclosure. And to enable directors to take a more long term view of the company rather than being required to focus purely on short-term profits. These are the issues I believe debate needs to focus on.

I believe we need a balanced approach. One where companies recognise their wider duties - and the benefits of doing so. But which does not put barriers in the way of businesses being competitive.

Requiring directors to take equal account of all interests would not provide the result most people are looking for. There will always be conflicts of interest.

But we must ensure that the framework of company law allows and encourages directors to take wider responsibilities into account. We certainly must end the situation where anyone can claim that they are prevented from doing so by the law.

Above all, we need an approach which actually recognises the needs of stakeholders. Which enables companies to look at the interests of stakeholders.

I believe that a key part of the answer lies in disclosure. In the modern economy shareholders can exert great influence. And shareholders increasingly want to know what the company is doing in a whole host of areas that relate to their stakeholders.

There will be much debate about what disclosure should mean, who should manage it, and how much should be compulsory.

Disclosure will need to cover a number of important issues - such as relations with suppliers, customer complaints, employment policies, corporate governance, environmental, social and ethical policies where these are material to the business.

Above all we will want to ensure quality not quantity of information so that shareholders, customers and other stakeholders can make informed decisions.

In particular, we should remember that many companies already regard minimum legal requirements as a base on which to build and will want to build on any requirements we make statutory.

Other factors are already driving greater disclosure. We are seeing growing shareholder interest. An increase in ethical awareness by pension and investment funds.

Investors want quality information on relevant issues. And it is in companies' interest to provide that information.

I want to have a real debate about information disclosure - what is relevant and in what form should it be made available.

Already many funds being operated show that there is a keen interest in corporate social responsibility.

2.6 billion of savings funds are now committed to ethical investments.

Members of British trade unions belong to some of the biggest pension funds in the world.

At some recent AGMs the TUC has joined unions in other countries to sponsor resolutions on issues such as child labour, and the independence of non-executive directors.

And the University Superannuation Scheme - Britain's third largest pension fund controlling assets worth 20 billion - has recently appointed two managers to oversee the social aspects of the companies they invest in.

This Government is keen to support this type of approach. From next month, trustees of Occupational Pension Schemes will be required to state the extent to which social, environmental or ethical factors were taken into account in the selection, retention and realisation of investments.

Progress is being made.

I have no doubt that if we are to create the sort of legal framework we want to see, there is more to be done.

This is an area this Government takes seriously.

If we can get a framework in place in which company law is reformed and modernised, we will realise our goal of economic prosperity and social justice.

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