Companies Bill

Written by Malcolm Bruce MP and published in The House Magazine on Sun 25th Jan 2004

The Government appears to be approaching company law reform like it is a particularly large and unpalatable pill. It knows it needs it if British business is to remain healthy but fears it's just too big to swallow in one go.

The Government's solution of how to address the need for fundamental reform is to adopt a 'nibbling' approach. In the previous Session, it nibbled off a piece with the Enterprise Bill, dealing with insolvency and bankruptcy issues. With the publication of the Companies (Audit, Investigations and Community Enterprise) Bill we are looking at another nibble, this time audit regulation and the creation of the community interest company.

British businesses can only hope the Government regains its nerve and takes its medicine soon.

The Liberal Democrats have long argued the case for sweeping modernisation of company law. We anticipated a companies bill to be put before parliament would be one of the longest and most complicated, but one that could revolutionise the way companies are run, they way they report and the way they impact on the community. It would pare back the regulatory burdens heaped upon British businesses and provide a framework that would allow them to invest and innovate domestically and interact seamlessly in the global economy.

Instead, the Government has introduced a small piece of legislation which effectively adds another layer of regulation with which to smother business. We remain extremely concerned about Governmental recalcitrance over the implementation of desperately needed overall reform of company law.

Arguably the most important measures in this Bill are simply a knee-jerk reaction to the US's knee-jerk reaction to the Enron and WorldCom scandals. These high-profile failures have shaken confidence in corporate governance and by accepting this legislation British business will go some way towards restoring it. Legislation introduced to provide a quick fix to recent crises however are by their nature myopic and have the potential not to safeguard business and investment but to reduce freedom and efficiency.

Raising the standards of corporate governance and auditing is very worthwhile but we must not create a system which, through fear of liability, discourages auditors and directors from serving those companies which arguably need them most. For this reason we welcome the Government's decision to consult publicly on the subject of director and auditor liability. Hopefully any changes required will be able to be included in this Bill in later stages.

The Liberal Democrats would like to have seen a much firmer commitment to corporate social responsibility within the Bill by way of the Operating and Financial Review. The demand for such reporting is already here. The Co-operative Bank's Ethical Purchasing Index published late last year estimated that the cost of consumers switching brands for ethical reasons was £2.6 billion in lost business. Ethical consumerism may be a relatively new phenomenon, but customers are beginning to realise that by flexing their buying muscles they can make a significant and financially punitive impact on those companies they believe to be damaging the environment or which have unscrupulous labour practices.

It is in a company's own commercial interest to promote itself as principled and environmentally sound. The role of Government is not to create rigid reporting codes but to ensure that the reporting that is produced goes deeper than a PR's glossy interpretation of what a company knows it should be.

The Liberal Democrats have welcomed the Bill's creation of community interest companies for the very real benefits they could bring to deprived areas. Critics may dismiss them as powerless against large corporations but these enterprises find most fertile ground in inner cities and rural areas - in other words, the areas abandoned by big business. They also typically employ the long-term unemployed, older people and the disabled.

CICs will have to prove their philanthropic value and must only be instituted to fill a gap and satisfy genuine need. Without the right kind of support they could easily prove to simply be another Labour Government gimmick. The Government also needs to clarify what status a CIC in fact has; it will be established exclusively for charitable purposes, operate as a charity and act in accordance with charity law…and yet not be a charity. That is paradoxical.

The Companies Bill therefore tackles a number of issues that need to be addressed and includes some laudable reforms. It is, however, a very small step in the journey towards creating the modern framework of company law British business so desperately needs.