Transparency and Public Trust in Business

Martin Horwood Excerpts

Tuesday 8th April 2014 Commons Chamber

[The Parliamentary Under-Secretary of State for Business, Innovation and Skills (Jenny Willott)]

I congratulate the hon. Member for Wigan (Lisa Nandy) on securing this very important debate. I completely agree with her about the importance of getting this issue right. As she said, it has very wide repercussions not just in the UK, but in communities across the world. British companies work in so many countries. It is critical to get it right here, because it may have such broad repercussions on thousands, ten of thousands or hundreds of thousands of people. This important subject is not debated enough in the House, so I congratulate her on securing the debate today.

Business should be, and often is, a force for good in society. However, as the hon. Lady highlighted, the financial crisis a few years ago revealed severe shortcomings in corporate governance and caused widespread and understandable loss of trust for many people in relation to not only the financial sector, but business more generally, and we need to tackle that. At the same time, there was a realisation that companies had grown so powerful that their activities could have an impact on even the largest economies. The development of such a situation was a real wake-up call to many Governments.

Among the lessons that we have learned from the financial crisis, I want to highlight three areas on which the Government are taking action, and which relate to the points emphasised by the hon. Lady—greater transparency, accountability to both shareholders and wider society, and businesses and shareholders taking responsibility for the impact of their actions.

Mandatory reporting requirements are the key lever that the Government use to increase transparency. At its best, the narrative section of a company’s annual report allows investors to make informed choices through a proper understanding of the company’s strategy, the risks that it faces and its long-term sustainability. There is also the wider public interest to consider. As I have said, companies can have a significant impact on communities and the natural environment in which they operate. Requiring businesses to report fully and openly is therefore the first essential step towards social responsibility and accountability.

As the hon. Lady highlighted, shareholders have responsibilities as well as rights. As owners of a company, they have a duty to understand its operations and hold the board accountable, which is a very important role for them to play in our economy. That is especially the case for investment companies that place funds on behalf of savers and pensioners who are not in a position to exercise their ownership rights directly. They can be incredibly powerful in their role in influencing the direction of the company and how it operates.

The Government are not just talking about transparency but have taken action to ensure that we see greater transparency. Last October, the Government’s new reporting reforms came into force, increasing the transparency and quality of disclosure by both listed and private companies. The new reporting framework requires companies to set out clearly in their new strategic report how they operate, where they are heading and how they are managing risk.

In addition, we introduced important new reporting requirements in three areas related to the issues that the hon. Lady highlighted. On the environment, companies are now required to report on their greenhouse gas emissions and other environmental impacts. On gender balance, they now need to state the number of men and women on their board, in their senior management team and in the work force as a whole. I know that she has an interest in that issue. Finally, they need to report on human rights issues, which were at the heart of some of the examples that she gave.

[Martin Horwood (Cheltenham) (LD)]

I commend my hon. Friend on the work that she and her team are doing in the Department. One point that the hon. Member for Wigan (Lisa Nandy) rightly made was that there are still voluntary arrangements in place on human rights and the environment in the supply chain. As the hon. Lady said, the risk of voluntary arrangements is that the best companies comply but those that we want to do better are allowed to get away with competing unfairly with those pursuing best practice.

[Jenny Willott]

I reassure my hon. Friend that the UK’s requirements already go beyond a lot of the voluntary principles that have been in place. We have agreed in the EU stronger mandatory reporting requirements for large companies to disclose their policies in a number of areas, including in their supply chain, which my hon. Friend highlighted and in which I know the hon. Member for Wigan is interested. That is a huge step in enhancing transparency, and for many member states of the EU it is the first time that they have had such broad requirements. The UK has traditionally been further ahead in mandatory requirements on businesses. I personally feel strongly about the issue, and it was one of the first that I raised in the Department when I took on my role. I will come in a minute, if my hon. Friend the Member for Cheltenham (Martin Horwood) will bear with me, to some of the reasons why I believe there is a driver in the UK economy for businesses to act voluntarily.

The requirement to report on human rights issues is in line with the Government’s implementation of the UN guiding principles on business and human rights, which the hon. Lady highlighted. The first annual reports under the new requirements are just being published, and early signs are encouraging. I am proud that, as I have just said, the UK is leading the way in high-quality company reporting, which will really make a difference. For example, the clothes retailer H&M now not only publishes a list of all its suppliers but sets out the standards and codes of practice that it expects them to meet. Marks and Spencer uses a social enterprise technology provider, Good World Solutions, to gather feedback directly from 22,500 workers in its clothing supply chain in India, Sri Lanka and Bangladesh, ensuring that they can raise concerns without fear of reprisals or discrimination. There are companies in the UK that are doing a significant amount to tackle some of the problems that exist.

As I highlighted to my hon. Friend, we have been negotiating with our EU partners on a related proposal to improve companies’ reporting in general. The EU non-financial reporting proposals have now largely been negotiated and broadly mirror our own regulations, and I hope that they will be adopted before the European parliamentary elections in May. They will start to drive behaviour change in the EU more generally, which will provide more of a common platform for companies operating in the EU. British domestic regulations led the way and have given our companies and shareholders a head start.