Company Law Reform Bill [HL]

My Lords, the noble Baroness has tabled some interesting amendments that echo amendments tabled in Grand Committee, to which several Members of the House have spoken. The amendments would strengthen the requirements of the business review and reintroduce elements of the Operating and Financial Review. However, I fear that this would impose unduly onerous burdens on all companies, not only quoted ones. The OFR was originally a requirement for quoted companies only. No evidence from the Government’s recent consultation on narrative reporting suggested that any requirements to report on specific information relating to the environment, employees, and social and community matters should apply to a different set of companies. We made it very clear yesterday in our discussion on Clause 156 that we are determined that the essential duties of directors should be clear, and we have made the link between that and the business review. The business review is therefore clearly positioned so that people can judge how well directors are doing against those duties. I think that it would be sheer folly to pile unrealistic and onerous reporting duties on them. On the point about contractors, many companies I know of have 500 or 600 contractors and others working for them in disparate relationships. The idea that directors are required to have some kind of responsibility not only to provide a good service but to have regard to the environment and all other policies is quite impossible. In any case, it is for those companies to answer for their responsibilities. What the amendments suggest is simply not feasible or practical. If we are going to make the business review work sensibly, we must be very clear about what is practical and sensible and not place too great a burden on companies. Amendment No. 194A, which would remove the words ““where appropriate”” from the beginning of subsection (4)(b) of Clause 395, would remove the directors’ ability to judge whether it was appropriate to include analysis using non-financial key performance indicators in the business review. That would make the provision much more onerous than the EU accounts modernisation directive, and we do not think that that is justified. New Clause 395, in government Amendment No. 196, provides that, where directors of quoted companies do not consider certain information to be material, they must say so in the review. We think that that is the way in which to do it, because that will be a prompt to directors to consider such matters. Amendment No. 194B would require all companies to include analysis using key performance indicators on the impact of the company’s policies and activities on the environment, on the communities they operate in, and on employees and other contractual arrangements, as well as the extent to which such policies have been successfully implemented. Elements of this are now incorporated into the new business review in Clause 395. But, again, we have included them for quoted companies only. We see no justification for imposing on other companies requirements over and beyond what the EU directive requires. That is not to say that we do not think other companies should be reporting less. We have rationalised the narrative reporting requirements in one place under new Clause 395. Although the information specified under subsection (5) is required of quoted companies, there is nothing to prevent other companies from providing this level of information, too. Indeed, we hope that they are encouraged to do so. Amendment No. 194C would remove the exemption for medium-sized companies having to disclose non-financial KPIs. The exemption is an option that the EU directive allows member states in implementing the business review requirements. Again, we see no justification for not granting this exemption in the UK. Not to do so could hinder the competitiveness of UK plc. We recognise that the CORE coalition, the TUC and some other interest groups called for all or some of the OFR provisions to be reinstated or inserted into the business review, as the noble Baroness’s amendment seeks to do. However, some business organisations argued strongly against reintroducing the OFR reporting burdens. That is not to say that companies were against the OFR in itself. Quite the contrary: many companies remain supportive of the OFR and already produce voluntary OFRs. Their contention was to avoid reimposing the undue cost burdens of the statutory OFR. We have therefore elaborated on specific information relating to environmental, employee, social and community issues to be included for a better understanding of the company’s business. This is the basic level of information that we would expect quoted companies to include in their business review. But if the directors consider that such information is not necessary for a better understanding of the company’s business, they may say so and not include it. This is a matter for the directors’ judgment. Finally, Amendment No. 314A would require the auditor to report on any other matters that are inconsistent with the information provided on non-financial KPIs that have come to their attention. We see this as reimposing a significant burden. The matter of the audit requirements was raised by a majority of the respondents to the Government’s recent consultation. Some called for an audit opinion stating not only whether the business review was consistent with the accounts, but also that there were no inconsistencies with matters identified during the audit. That had been the level of audit scrutiny for the OFR. Others, however, pressed strongly for this higher level of audit requirement not to be reintroduced on the grounds of undue cost burdens. As I said earlier, removing the higher level of audit requirement for the OFR was a major saving of £30 million made by repealing the requirement for a statutory OFR. This is a crucial area of regulatory impact relating to narrative reporting that we have had to consider. We believe that the benefits of greater assurance on the business review do not justify the significant additional cost burdens of this additional audit check. We recognise that the noble Baroness proposes to limit the scope of the additional check by the auditors to reporting on inconsistencies with non-financial KPIs only, rather than on all information in the OFR. In reality, that will be no less of a burden, because the checking of non-financial information is onerous and therefore extremely costly, as I am sure the noble Lord, Lord Sharman, on the Liberal Democrat Front Bench will concede. This would be a nightmare in terms of costs and difficulty. That is why we propose that auditors should continue to be required to report only on the consistency of the business review as part of the directors’ report, with the accounts, as required under Clause 487. We have developed what we believe to be a balanced and consistent package of proposals on narrative reporting, which reflects the outcome of our recent consultation and our discussions with interested parties. Our objective has been to ensure effective and appropriate narrative reporting without imposing unnecessary burdens on companies. We want to make a very clear statement of what we think are the principles of the directors’ duties. We will stand very carefully behind that responsibility. We want to have reporting on this, but we want to do so without imposing on business a huge regulatory burden. I therefore urge the noble Baroness to withdraw this amendment.