Company Law Reform Bill

I am grateful to the noble Lord for raising this issue, which has been the subject of much consideration over the past few years. We are very sympathetic to the thrust of this amendment. As the noble Lord, Lord Freeman, said, best practice has moved on, and we need to take account of that. Section 319 of the 1985 Act, which applies to all companies, requires specific shareholder approval for directors’ service contracts of more than five years. A shareholder resolution must approve the specific term of agreement setting the period. The maximum permitted duration of directors’ contracts of employment is of importance in setting the maximum compensation for loss of employment. The combined code also has provisions on this. Listed companies have, as a condition of listing, to ““comply or explain”” to the provisions. These say:"““Notice or contract periods should be set at one year or less. If it is necessary to offer longer notice or contract periods to new directors recruited from outside, such periods should reduce to one year or less after the initial period””." In 1999, the Law Commissions recommended a reduction in the period in Section 319 from five years to three years, although it suggested that further consideration should be given to the position of small companies. The Company Law Review consulted on whether the limit should be reduced to one year, with flexibility to contract for three years on first employment, both limits to be subject to extension by members’ resolution. The great majority of responses supported a reduction of the five-year maximum to three, but there was quite strong opposition to the reduction to one year, except as a matter of ““comply or explain”” as a listing rules requirement for listed companies. Concerns included the possible competitive disadvantage for British companies in the market for management skills internationally, and whether this would lead to excessive remuneration on the shorter contracts. It was also argued that this might be appropriate for public companies, but not for closely held private ones. The Company Law Review concluded that the normal maximum should be one year—or three on first appointment—but that this should be able to be overridden by shareholders if they wished. The Directors’ Remuneration Report Regulations 2002 introduced both more comprehensive reporting by quoted companies on directors’ remuneration—including information about service contracts—and a compulsory shareholder vote in quoted companies on the directors’ remuneration report. Research by Deloittes demonstrated that these regulations have led to substantial and direct improvements in the transparency of executive remuneration. The regulations thus acted as a catalyst for increasing company accountability and effective shareholder engagement. In principle, we are sympathetic to the intention behind this amendment. Five years is, in our view, too long and we agree that the period could sensibly be shortened. We would not want to introduce different provisions for public and private companies—especially as the combined code already provides stricter provision for quoted companies on a ““comply or explain”” basis—but we would want to check whether a reduced period would cause real difficulty, in particular for smaller companies. We would therefore like to consider this amendment, do some more consultation and come back on the issue. As the noble Lord has said, best practice has moved on, and we should reflect it.