Companies and Partnerships (Accounts and Audit) Regulations 2013

Lord Young of Norwood Green Excerpts

Wednesday 17th July 2013 Grand Committee

I have one final point. UK plc needs first-class men and women to act as executive and non-executive directors of our public companies. They are the backbone of our economy. We need to strike a balance and find an appropriate level of transparency and disclosure while avoiding a situation where the personal financial rewards that quite rightly follow commercial success lead to finger pointing and the politics of envy. It is in all our interests to ensure that this balance is properly struck, but I am not sure that we have achieved it this afternoon.

[Lord Young of Norwood Green]

My Lords, I do not profess to be very expert in this area, but I declare an interest as vice chair of the Ethical Trading Initiative and somewhere in the comprehensive report from the noble Viscount there was a reference to environmental, social and human rights issues and supply chains.

I do not have a lot to say on the first set of regulations, which seem to be about tidying up and closing a loophole, although the question of whether there would be any tax consequences as a result of the changes occurred to me. I thought the point about narrative reporting was interesting and I could not help reflecting on the experience of the noble Lord, Lord Hodgson, and the range of his comments. I suppose there is one side of me that inclines to what he says—that less is probably more. He is probably right. As a small shareholder myself in a number of companies, how many times do I bother to wade through the annual report? It is not very often, unless I am really desperate in my reading material. However, I think that the companies that we are talking about have a duty to report comprehensively and responsibly. We do not want any more of it than is necessary but we cannot honestly say that everything is right these days and that we are in a climate where nothing bad happens or where companies’ behaviour is always perfect. The Minister conveyed a lot of interesting information to us about narrative reporting.

Overall, I welcome the new strategic report section and the way that it will deal with environmental, social and human rights issues. The Minister mentioned Bangladesh, which is just one example of how this can impact on companies. What I did not hear in all his comments was any mention of ethics, which are important to the way that companies behave. If this points them in that direction, that is a good thing. Company policy on ethical behaviour is becoming more and more important. We see large companies behaving very irresponsibly and unethically, and then being required to make enormous payouts. The recent example of payment protection policies is one of a number of such cases. These regulations would certainly not do those companies any harm.

The Minister then talked about the action plan on business and human rights, and the requirement to report. I think I am right in recalling that the Foreign and Commonwealth Office are supposed to be publishing a document soon on the UN Ruggie principles. Will this legislation encompass those principles?

I welcome the section on gender reporting, especially on board members, although not on that alone. It is important that we see how much progress has or has not been made. In the current climate, if we are serious about controlling greenhouse gas emissions, that is perfectly reasonable as well. An area that interests me, which I would not mind seeing in an annual report, is—

[Lord Hodgson of Astley Abbotts]

The noble Lord talked about gender reporting on boards. I understand that and am in favour of it. However, he has only to look at the list of the directors at the front of the annual report to see who are men and who are women and to draw his own conclusion. We do not have to have a section on gender reporting. The information is all there and people can gather it together.

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[Lord Young of Norwood Green]

I am sure it will be there, but the report does not actually say what the company’s policy is on gender balance on its board. That is of interest to stakeholders and investors. I agree with the noble Lord that there is a balance to be struck but I am with the Government on this one.

As I was saying, one area that interests me and which I would not mind seeing in annual reports—it might be there already, buried away—is the amount of training that companies provide and the number of apprenticeships that they take on. That is another interesting signal of their attitudes towards their workforce and this is an area to which this Government, after all, say they are absolutely committed. We know we need a more skilled work force and more apprenticeships, so a requirement in relation to those areas in the regulations would not go amiss.

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[Viscount Younger of Leckie]

My Lords, I thank my noble friend Lord Hodgson and the noble Lord, Lord Young, for their contributions to this rather short, succinct debate. I am very sorry to hear that my noble friend Lord Hodgson is so pessimistic about these proposals to make improvements to reporting. He made one or two good points, and I will pick them up, but he will not be surprised to hear that I do not agree with all the points he made.

My noble friend made a good point about the size of the report. The noble Lord, Lord Young, mentioned concern about extending the report to include a strategic report given the history of reports and the example of my noble friend Lord Hodgson of a report that was 15 pages a few years ago and is now 70 pages. It will be up to companies to decide how long their reports will be and, no doubt, they will want to make them as succinct and readable as possible to include the extra requirements. I hope that will include cutting down on other areas so that the reports will be more readable.

My noble friend Lord Hodgson was concerned about the disclosure of risk. He raised an important point. The guidance on the strategic side of the report will provide guidance for businesses on deciding their key risks. He made the important point that it is quite challenging for a company to decide what risks are under its control and what risks are not, such as the economy. The guidance is designed to help with that approach but it will be up to the company to decide what it puts into its report on an annual basis. This guidance will be published for consultation and I encourage my noble friend to respond when it comes out.

My noble friend Lord Hodgson and the noble Lord, Lord Young, raised the safe harbour provision. The answer to the question, “Is there a safe harbour provision for directors?” is yes. The detail is in paragraph 17 of the schedule. It extends the safe harbour provision in Section 463 to the strategic report. The Companies Act permits directors a defence that they were not reckless, and we have made a consequential change to the law to extend this safe harbour defence to the preparation of the strategic report. I hope that that gives some comfort to my noble friend Lord Hodgson.

My noble friend Lord Hodgson raised the issue of the numbers of women being included in the report. It is fair to say that he was somewhat exercised by this. However, I hope I can reassure him, and answer a question about this matter from the noble Lord, Lord Young, by saying that this is about ensuring that businesses are managing their boards better to understand their customers, investors and staff. Evidence suggests that diverse boards are better boards and help employees who may hope to move up into management. The whole objective is to be transparent and to provide full and purposeful figures and to allow stakeholders to look at the reports. The measure is designed to be helpful to them as opposed to simply not including them.

My noble friend Lord Hodgson did not agree that the single figure disclosure would provide accurate and useful information for shareholders. I think that he was referring to the new figures that will be required. He gave the example of a director’s pension. I totally understand his point about pensions being pretty complex and that to reduce them to a single figure is challenging. As regards the example that he gave, it would be fair to say that, just as in company reports and auditing reports, you would have a codicil saying, “This figure is particularly high because of a particular aspect”, which would make the issue clear. Perhaps my noble friend was making the broader point that if you put in single figures the whole time you may obscure the bigger picture. I hope I can reassure my noble friend that companies will have guidance on this and will have to make simplicity a byword when reporting these figures. The regulations will prescribe the minimum requirements but there is nothing to stop companies providing any other material that would help shareholders better understand the information or put it into context, which is the nub of the matter. My noble friend asked whether the Government would undertake to review the regulations and their effects. The noble Lord, Lord Young, also asked about reviewing. The Government have committed to review the regulations in 2017, which is not too far off, so I hope that gives some comfort.

The noble Lord, Lord Young, asked whether the strategic report would include a company’s ethics policy, which is an interesting point. The annual report will promote discussion at the annual general meeting on the ethics of the company’s business practice, so I hope that reassures the noble Lord. He also raised an interesting point about charitable donations and asked why we were planning to cut the figures relating to those donations. The format of the charitable donations disclosure required companies to disclose the name of the recipient, the amount and the true purpose. For those companies which make a lot of donations this was becoming a burdensome requirement. The total figure is still included in the accounts but the objective of this move is to leave out figures that are becoming somewhat meaningless and rather burdensome.

The noble Lord asked whether these measures had any tax consequences. There are no direct consequences and the tax transparent status of partnerships is unaffected. The changes that we are proposing do not amend the tax law. The noble Lord also asked about pay ratios and, specifically, why we did not require companies to report on the pay ratio between directors and the average worker, which is a fair point. Companies will have to say more about how the remuneration committee has taken into account employee pay and publish the percentage increase in the pay of the chief executive and that of the workforce. However, disclosure of pay ratios has its limitations and could provide misleading information. For example, a company with a large number of low-paid employees would have a big ratio but a company that had outsourced such employees, which might be less socially responsible, will none the less have a better ratio for entirely artificial reasons.

The noble Lord, Lord Young, asked whether apprenticeships could be covered in the report. Indeed, the company can include in it additional useful material. Where a company has several apprentices, we hope that it will inform shareholders of that and shout it from the rafters.

[Lord Young of Norwood Green]

I refer not only to apprenticeships but to training, given the importance of reskilling.

[Viscount Younger of Leckie]

Training, I would argue, comes under human resources policy. Again, it would be up to companies to decide whether they want to include specific training aspects. There is no obligation to do so, but they are wise to do so if it is going to materially benefit shareholders.

The noble Lord, Lord Young, asked why payment to creditors was omitted. The disclosure required companies to make a statement as to how they paid their creditors. Most companies, even rogue traders, stated that they paid their creditors on time. So we feel that the work on the prompt payment code, to which I alluded in my speech, will provide a better response.

The noble Lord also asked why there was a request to state the principal risk, which was a point that I made earlier in response to a question from my noble friend Lord Hodgson. It implements the terms of the EU accounting directive. That was a separate and extra point that I wanted to make.

I hope that I have answered all questions raised. If not, I shall be more than happy to write to noble Lords.

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[Lord Young of Norwood Green]

I asked about the effect of the action plan and the requirement to report on business and human rights, and whether it had embraced or taken into account the UN Ruggie principles.

[Viscount Younger of Leckie]

Indeed, the noble Lord did ask that question. The human rights reporting requirement is broadly worded deliberately. However, it was inspired by the words of Professor Ruggie, which may be of some comfort to him. The FRC will provide guidance on how this may work.