In this age of personality-driven politics, when the attention spans of the media and the electorate alike seem to shorten by the year, it’s not surprising that few recent British governments have put a priority on reforming the country’s Victorian company law. And who can blame them? Faced with a choice between kissing babies or embarking on a three-year review of company law with its endless committee meetings and 500-page legal documents, successive governments have opted for the former. Reform has been necessary from both a legal and business perspective for years, but the politicians decided to ignore the issue – after all, reforming company law is not exactly a vote-catcher.
But that isn’t the approach now adopted by the current UK government. Back in 1998, its Department of Trade and Industry (DTI) launched the first long-term fundamental review of company law in generations.
The consensus is that the review is badly needed. ‘A root and branch overview of UK company law is long overdue,’ asserts John Pierce, chief executive of the Quoted Companies Alliance, the association of UK smaller listed companies. ‘It’s the first time the issue has been looked at in around 50 years. The law is finally catching up with technical progress,’ he adds. Arguably, there has been no fundamental review since the mid 19th century, an age before telephones, air travel and even investor relations.
Pressure for a comprehensive review had been building for years before the government finally announced the current revision. And the huge scope of UK company law, embracing everything from directors’ duties to reporting stipulations, meant there was plenty of work when the review began back in 1998. Since then, three separate hefty consultation documents have been published and put out for consultation, with the most recent, the 400-page Completing the structure, recently finishing its consultation period. Now the steering group is preparing to present its final set of recommendations to the government.
The process is led by an independent company law review steering group, which includes luminaries like Sir Bryan Carsberg, secretary general of the International Accounting Standards Committee, and Martin Scicluna, chairman of Deloitte & Touche. Beneath it operate a string of working committees, with around 200 individuals in all helping advise the steering group.
Small is beautiful
From the outset it has been clear that the steering group plans to build a new company law structure around the needs of small companies, providing clear add-on provisions for larger firms, while also plugging major gaps in current legislation to cover issues such as directors’ duties and electronic communications. ‘It has been a constant complaint of ours that company law has had to catch everything from an elephant to a flea. Smaller companies don’t need such a plethora of rules when compared to giants such as BT,’ comments Pierce.
So far much of what the steering committee has come up with has been greeted favorably by relevant industry bodies. ‘A lot of large organizations support our proposals, but there are elements of the plans that they wish to comment on,’ reports Mike Barbier, DTI spokesman. He reports that the DTI has been ‘very pleased’ with the level of responses thus far: the second consultation document, Developing the framework, brought in around 450 submissions.
A few of the committee’s recommendations have certainly stirred up comment, most noticeably its proposal to get rid of company secretaries. This is one of the gripes of the UK Investor Relations Society (IRS), whose professional and public affairs committee has been working on a response to the latest consultation document. ‘We disagree with the review’s suggestion that companies do not need company secretaries,’ says Jill Sargeant, executive director of the IRS. ‘Abolition would weaken, not strengthen, the framework for corporate governance in this country. Company secretaries do a huge amount of work, and I can’t see who else is going to do it.’
This issue aside, the IRS is generally upbeat about the review so far. ‘We are in agreement with the review, we support the overall stance adopted by the steering group, and we like its flexible approach to company law,’ Sargeant adds. The society has been busy responding to points raised in about half a dozen of the chapters in Completing the structure, and apart from a couple of minor wording objections, Sargeant says the IRS is broadly happy.
Companies commission?
Despite the breathtaking scope of the review, the steering committee appears to have consulted widely and managed to upset few people with its recommendations. One popular idea is the proposal for a new companies commission, which will establish a set of sub-committees to examine issues like corporate governance, executive pay and annual meetings.
Jonathan Dunn, policy executive at Pension Investments Research Consultants (Pirc), the UK pension fund advisors, is pleased with the steering group’s plan for a corporate governance committee. ‘It’s good to see we are moving away from specific legislation for corporate governance and towards a body that will continually review it. In the past, governance codes have been decided by ad hoc committees and consequently they have become rapidly outdated,’ he says. Though the steering group has so far been light on details regarding the companies commission, Dunn is keen to see a wide range of interests represented: ‘Membership should be broad and with expertise. They will need to consult widely,’ he opines. Plans by the steering group to recommend the companies commission report directly to a government minister are also praised by Dunn. ‘We’ve been calling for this for a while,’ he adds.
The QCA’s John Pierce is more cautious in his verdict on the planned companies commission. ‘We have no major objections to the planned structure and framework; we just have to make sure that it doesn’t turn into another knee-jerk red-tape machine. It needs to take a medium-term view,’ he says.
Pierce is also unimpressed with plans to make all listed companies comply with the rules of the main board of the London Stock Exchange. ‘The Ofex and Aim markets allow smaller companies less regulations, and investors recognize this difference. The DTI’s plans would bring new costs and regulations to these businesses.’
Steering governance
While the steering group is proposing to delegate much of the review work on corporate governance to the companies commission, it still offers a host of proposals for UK governance. While the committee found little support for any change to the current Combined Code, it does recommend greater transparency on boardroom contracts as well as greater independence for non-executive directors.
More controversial are the steering group’s plans for shareholder voting. While it acknowledges the need for electronic voting and calls for more openness from investors on conflicts of interest which have helped to keep UK institutional voting levels below 50 percent, the group’s idea to start recording proxy votes is not supported by Pirc. Though he acknowledges that recording would both help trace the millions of votes that vanish each year during the UK proxy season, and encourage accountability to shareholders, Pirc’s Jonathan Dunn worries it could deter institutions from voting. ‘Financial institutions have complex relationships with companies and without confidentiality this could prevent them from voting independently,’ he cautions.
Another of the steering group’s proposals that has drawn much attention is the plan to require all listed companies with a turnover above £5 mn ($7.4 mn) to produce a regular operating financial review (OFR). The DTI’s Mike Barbier explains: ‘The OFR is only new in terms of it being a requirement. The Accounting Standards Board already incorporates it in best practice guidelines that many firms follow.’ The steering group also recommends that OFRs become much more inclusive by reporting to a wider audience.
Mark Goyder, director of the Centre for Tomorrow’s Company, is pleased that the steering group has recognized the need for improved reporting in the UK. ‘It’s radical and important,’ he summarizes. ‘This OFR requirement means that the finance directors of the future need not just worry about the cash flow and the balance sheet, but also about how they should go about reporting to different interest groups.’ A member of the company law review’s corporate reporting advisory committee, Goyder warns that reports will need to adapt to integrate audiences. ‘Companies will still be free to do things their own way, but the review should ensure that they begin to report inclusively.’
However, the steering group’s reluctance to endorse a legislative approach to encouraging inclusive reporting has disappointed Pirc’s Dunn. ‘It’s stuck in a position that would make social and environmental disclosure non-mandatory, and we would prefer that to be a legal duty as it would force companies to include important factors such as reputations and brands,’ he explains. However, he concedes, ‘Possibly this is something the steering group feels is best left to practice standards.’
The review also suggests that listed companies should continue to provide summary financial statements as a more digestible alternative to the annual report, targeted at retail shareholders. The content of these statements will be defined by the companies commission’s reporting standards committee.
Short shrift
Some companies have expressed concern at the likely increase in reporting requirements and tighter timetables, but these worries get short shrift from John Pierce of the Quoted Companies Alliance ‘I don’t have much patience with companies that complain about reporting schedules. In the US I worked in a company that took only ten working days to report and still produced accurate results. Public companies have serious duties to their shareholders, so they should welcome any drive towards improved and speedier information.’
Mark Goyder agrees with Pierce, arguing that improved reporting techniques will make improved, faster reporting easy. ‘Good design always means you get more utility for less sweat. Companies will soon be wasting less time than they do on the current annual report, which is not read or respected by people,’ he opines. ‘Companies stand to get a much bigger payback by doing their annual reports right, but so far only the top 10-15 percent of companies are looking in the right direction.’
Also contained in the consultation documents are recommendations about the use of the internet in corporate reporting, including a proposal that all companies should publish preliminary announcements online. The review also expresses support for a standard electronic filing format for the UK, similar to the SEC’s Edgar in the US. Though the steering group does not recommend compulsory electronic filing of information yet, it does foresee electronic filing becoming compulsory in the future, but only after most companies decide on their own to do it voluntarily.
‘Changes in technology are being reflected in the review by issues such as electronic communications, which will save companies an awful lot of money. The review recognizes officially for the first time the value of the internet,’ Pierce says. And he adds: ‘We’ve been encouraging members to communicate fully over the internet because it allows them to converse with shareholders. Web reporting can become a great marketing tool.’
According to Mark Goyder, companies that act early to implement the steering group’s recommendations stand to gain the most. ‘Well-led companies will start to think about implementing the proposals now,’ he suggests. ‘We’re not talking about mere compliance; much of this will be leading edge, helping firms to deal with the intangibles quandary,’ he explains.’
In spite of the huge task facing them, the company law steering group has managed to produce a fundamental review of the rules that govern UK companies without causing too much controversy. The review has come under fire from some sections of the British press for not being radical enough, but given the sheer size of the job, it’s not surprising that this review has disappointed those seeking a more radical overhaul. This article has only been able to scratch the surface of the proposed reforms. There are plenty more changes on the horizon that we haven’t even mentioned here.
But reform won’t take effect for a while yet. If you’re waiting for a revolution in UK company law, don’t hold your breath. Once the steering group has presented its final recommendations early next month, the UK government then has to draw up a bill for the revision of company law. Given the pressure on parliamentary timetables, no-one should expect any new legislation until 2003 at the earliest, the DTI warns. Others calculate that a new companies act wouldn’t start to bite until 2005.
But for the UK’s listed companies, there’s no harm in beginning preparations early. And there’s no time like the present to start.
