Session 2002-03 13 May 2003
Press Notice 70
THE WHITE PAPER ON MODERNISING COMPANY LAW
Publication of Report
The Trade and Industry Committee today published its Report on modernising company law. The Committee concentrated on a few key questions of principle:
the duties of directors;
how to protect the independence of auditors;
the role of institutional investors in ensuring good corporate governance; and
whether - and if so, how - companies should be required to report on their environmental, social and employment policies.
The Committee approves of the White Paper’s formulation of directors’ legal duties which, for the first time, recognizes that good management requires directors to take into account the interests of key groups such as employees, suppliers, customers and the local community, and of the environment. On non-executive directors, it welcomes the recommendations of the Higgs Report, believing that they will strengthen scrutiny of management decisions with a view to the long-term health of the company.
The Committee also comments on the extensive review of the rules to ensure independence of auditors and to restore confidence in company reporting and accounting mechanisms. It concludes that the Government's proposals to limit conflicts of interest achieve a reasonable balance between statutory requirements and regulation by independent bodies; but the Committee warns that legislation should not be ruled out if looser forms of regulation fail.
The Committee suggests that, for the Government's proposals to succeed in improving corporate governance, there will need to be more positive engagement between investors C especially large institutional investors C and the companies in which they hold shares. While agreeing that it is desirable for investors to exercise their power of "voice" rather than "exit", the Committee doubts whether many investors have the time, money or capacity to be as active as would be necessary.
On extending the scope of financial reporting, the Committee supports the proposed requirement for the largest companies to produce Operating and Financial Reviews on the social and environmental factors relevant to the company. These will provide improved insight into the company's operations and prospects, both for shareholders and for other interested parties.
Commenting on the Report, Martin O'Neill MP, Chairman of the Committee, said: A The Committee welcomes the comprehensive review of company law that has taken place over the last five years, and particularly the decisions to draft new legislation with the small company primarily in mind, and to simplify and codify the main principles of company law.
“We support the thrust of the White Paper which is to establish mechanisms to enhance transparency and promote good corporate governance. In particular, we welcome the proposed draft of directors’ legal duties and the improvement to annual reporting provided by the requirement for large companies to produce Operating and Financial Reviews.
“However, we are concerned that there may be too much reliance on the policing role of institutional shareholders, without full recognition of the limits to the time and effort pension funds and others can devote to individual companies. And although we believe that the recent proposals made by the accountancy profession to reduce conflicts of interest within auditor companies are a step forward, we would not like the Government to rule out legislation if other forms of regulation fail to restore confidence in the accounting system.
“Overall, we think that this long review process should be brought quickly to a close and request the Government now to provide a date for publishing the Companies Bill.”
Copies of the Sixth Report can be downloaded from our website: (www.parliament.uk/commons/selcom/t&ihome.htm)
13 May 2003