Company Law Reform Bill [HL]

moved Amendment No. 78:"Page 69, line 9, leave out from ““act”” to end of line 28 and insert ““, in good faith, in what he considers to be in the interests of the company””" The noble Lord said: My Lords, this is a key amendment. It would leave Clause 156 indicating only that a company director must act in good faith in what he considers to be the interests of the company. That is the present position in law. It is well established and well understood. My amendment would remove the list of other duties that the Bill seeks to codify. We will have an opportunity, following this amendment, to consider the explanation for the fresh draft produced by the Government in Amendment No. 79. We believe that Amendment No. 79 is unacceptable and that we should pursue the status quo. We should give guidance on other issues—which will continue to develop in coming years—of which directors should take account. We on this side of the House support the principle of ““enlightened shareholder value”” in the management of businesses. That is not at issue. The Company Law Review was right to introduce the concept and to talk about the issues that any sensible board of directors should consider in the discharge of their responsibilities. We believe in the pursuit of good corporate governance. Indeed, many of my noble friends on this side of the House and many noble Lords from the Liberal Democrat Benches—to say nothing of those on the Government Benches—belong, as I do, to the All-Party Parliamentary Corporate Governance Group and support its work. We also believe that directors should discharge high standards of corporate social responsibility. That, too, is common sense. Any good company and any sensible board—whether of a large or small company—will adopt and implement the principles enshrined in the Company Law Review and, indeed, in the Government’s amendment. However, the argument is not about whether these principles are correct; it is about whether they should be codified in law, which implies rigidity, potential liability and extra cost. The Government’s approach in Clause 156, as proposed to be amended by Amendment No. 79, is to pursue dialogue with the various lobby groups and interest groups, including noble Lords on this side of the House, and seek a compromise. I have paid tribute to the noble and learned Lord the Attorney-General and to the noble Lord, Lord Sainsbury. However, I am sorry to say that the compromise is a muddle. It is wrong in principle and it should be rejected. It is a compromise between, on one hand, those who favour retaining the status quo on the face of the Bill—with guidance being given to boards of directors—and, on the other, the lobby groups and those who misguidedly say that you should put into statute a whole list of other duties. This would be counterproductive. I have repeated the basic principle that directors should act in good faith in the interests of the company, meaning the interests of the shareholders. It is significant that a number of directors, company secretaries, lawyers and other advisers have made—and continue to make—representations to us on this side of the House about the muddled Amendment No. 79. Their argument—and ours—is that statute should give a clear and simple definition of ““duty””, understood by all. That should certainly be placed in statute, as in common law. However, for a broader modern understanding of that basic duty, on a non-statutory basis, the Secretary of State should have power to issue guidance on some of the other issues that boards should take into account. These will grow and change in number over the years. That is perfectly correct. Let me deal very briefly, so that the Attorney-General and others have plenty of time to contribute to this important debate, with four reasons why the Government’s proposal is flawed and our approach is correct. First, it is surely key to maintain the principle that directors must use their own judgment in discharging their duties. They must use subjective criteria and not follow rigid, prescriptive objectives contained in externally mandated rules. The Bill is clear, in Clause 157, that directors should use ““independent judgment”” in discharging their basic duty to shareholders, and, in Clause 158, that they must exercise—and here we agree—““care, skill and diligence””. The fundamental principle that each individual director must use his own subjective judgment as to what is in the interests of shareholders should not be shaken or clouded. Secondly, the Government acknowledge that the other duties in Clause 156 are not exclusive. I think that the Attorney-General has already indicated that they are not by the way in which the Government have sought to amend the clause. The duties outlined are indicative of a much longer list that could arise over time. It is far better, in this imprecise field, to use the more flexible and amendable mechanism of guidance notes. Thirdly, the proposed extended definition of duties would apply to all directors: from BP plc at one end, right down to the small company managing flats in a residential block at the other. That, surely, must be wrong. One size does not fit all. Finally, there is the argument repeated in today’s newspapers. I very much agree with it. The statutory route would significantly hamper the running of businesses, adversely affecting the wealth-creating sector of our economy. Boards would spend valuable time and costs seeking advice on whether they were following the strict letter of the law. Some existing directors would fear litigation from pressure groups. Some newly created companies might seek registration outside the United Kingdom—my noble friend Lord Forsyth drew attention to this risk earlier in today’s proceedings—and potential directors might be dissuaded from joining boards. I believe that the common sense way forward is to stick to the simple accepted definition of the duty of directors. They should have regard to the needs and interests of their employees, their customers, the environment in which they operate and the long-term sustainable future growth of their businesses, but guidance, not regulation, is the better way forward. I commend my amendment to the House. I beg to move.