Company Law Reform Bill [HL]

moved Amendment No. 194:"Page 178, line 33, leave out subsection (2)." The noble Lord said: My Lords, in moving the amendment I shall speak also to the 61 other amendments which stand in my name in this group. I said during the debates on the business review and the operating and financial review in Grand Committee that we hoped to bring forward amendments to reflect the outcome of the Government’s consultation on narrative reporting as soon as practicable. I am pleased that we have been able to do so in time for Report to give the House the opportunity for debate before the Bill passes to the other place. Our proposal on narrative reporting, which Amendment No. 196 will add to the requirements for the content of the business review, represents consistent and balanced policy in light of our recent consultations and discussions with interested parties. Our aim has always been to encourage meaningful, strategic, forward-looking information to assist shareholder engagement while avoiding disproportionate burdens on business, in line with our better regulation agenda. The Government have concluded that the additional burden imposed by the statutory OFR requirement is not justified in the light of the competitiveness of UK business. Amendments Nos. 200 to 202 and the consequential amendments will therefore remove the OFR provisions in the Bill. The proposed changes to the narrative reporting requirement will add value to the quality of the reporting without imposing unnecessary costs. As part of this package the Government will also clarify the position on liability for disclosures, both under the Companies Act and for implementation of the EU transparency obligations directive. To encourage open and meaningful reporting, it is necessary to provide certainty on the issue of liability. We expect shareholders to make full use of this further information. We want to achieve a proper balance between the ability of directors to report on their business in good faith and shareholder rights. The narrative reporting requirements have been streamlined so that the requirements for quoted companies are now more closely aligned to those for unquoted companies in the business review. Under the proposed new narrative reporting arrangements, all companies other than small companies will need to produce a business review as required by the EU accounts modernisation directive. The purpose of the review is to inform shareholders of the company and help them assess how the directors have performed their duty under Clause 156, which relates to duty to promote the success of the company. Quoted companies will need to ensure that, to the extent necessary to understand the development, performance or position of the company’s business, their business review includes certain information relating to the main trends and factors which are likely to affect the business in the future and to environmental, employee, social and community matters, as set out in Clause 395(5). Where directors have nothing to report on environmental, employee or social and community matters, the review must say so. Auditors will continue to be required by Clause 487 to report on the consistency of the directors’ report, including the business review, with the accounts, as is required by the EU directive, but there will be no additional requirements to check for inconsistency. This preserves the £30 million-pound saving made by repealing the requirement for an OFR under the Companies Act 1985. All companies will be exempted from disclosing in the business review information that is seriously prejudicial to the company’s interests. That extends to all companies. The exemption previously only provided for quoted companies producing an OFR. This will also mean that companies would be exempt from any disclosure that would prejudice national security. There will also be no statutory reporting standards for the business review as there were for the OFR. It is important to emphasise that the new narrative reporting proposals seek to enhance the quality of the narrative reporting without imposing unnecessary burdens on companies. In bringing forward these new measures we listened carefully to the concerns and wishes expressed by a wide range of business groups, shareholders and other interested parties. We also paid careful regard to the remarks made by noble Lords in Committee, and considered them closely. I turn now to the amendments to the new clause tabled by the noble Baroness, Lady Noakes. I am grateful to her for tabling Amendment No. 197, as it gives me the opportunity to explain the Government’s rationale behind specifying the purpose of the business review under the new subsection (2). Our reasons are twofold. First, specifying for whom the business review is intended is an important part of the package concerning liability. Specifying that the review is to inform members of a company is intended to make clear that the business review is designed for the benefit of members as a whole so that they may exercise their governance rights more effectively. It is not designed to help individuals decide on investment decisions, nor is it targeted at the wider public in the sense that they should be entitled to rely on it, although they may well read it. The effect of the provision is to limit directors’ liability to the company only, and ensure that neither individual investors nor anyone else is entitled to sue. In effect, this has codified an aspect of the Caparo judgment. We consider that making that clear will facilitate open and meaningful reporting. Secondly, we want to make an express link between the business review and the directors’ duties under Clause 156. That clause, as we discussed yesterday, embodies the concept of enlightened shareholder value. That is relevant to reporting on matters such as the environment and employees in the business review, which my noble friend Lord Clinton-Davis drew attention to yesterday. As we explained with regard to Clause 156, the Company Law Review concluded that the success of the company could only be promoted taking due account of such factors, which reflect wider expectation of responsible business behaviour. By making the link to directors’ duties, it helps to make clear that those factors contribute to the success of the company for the benefit of members as a whole, and it is in that context that directors are being asked to report on them. Subsection (2) is a response to the view of stakeholders during the Government’s recent consultation. Business and investor groups alike called on the Government to clarify the position on liability. As I said, specifying the purpose of the business review is one element of the package to limit directors’ liability. The direct link to directors’ duties was pressed for by a significant number of interest groups. They echoed the Company Law Review in seeing a clear and important link between enlightened shareholder value and narrative reporting. I therefore urge the noble Baroness to withdraw Amendment No. 197. I applaud the intention behind the noble Baroness’s second amendment. The effect would be to relieve companies from the burden of having to copy out into the business review information required to comply with the review, if it is already included elsewhere in their annual accounts and reports. We agree entirely with that aim. However, we believe the amendment is not necessary. Cross-referencing to material included elsewhere is already allowed, and happens in practice. The Government’s guidance on the business review makes clear that this is the case. We fear that making express provision in the Bill for cross-referencing would cast doubt on existing practice. I also reassure those with concerns about the validity of information for the business review that is included by cross-referencing. Any information that is included by reference to other materials elsewhere is subject to all the statutory requirements applied to the business review. That would include, for example, that the cross-referenced materials be subject to the same auditor’s report requirements as the business review as part of the director’s report, under Clause 487, and that all cross-referenced materials be circulated to every shareholder in the company and others entitled to receive the annual account or report, under Clause 404. I hope, in the light of this explanation and reassurance, that the noble Baroness will not press her amendment. I beg to move.