Shaking up company law

LAST week saw the shocks from Enron and Tyco hit share prices around the world - they fell to their lowest level since the tragic events of 11 September. The reverberations of Enron and Tyco are now beginning to affect the savings of ordinary British people holding insurance policies and pension funds and we must redouble our efforts to ensure similar scandals don't happen here in Britain.

Enron was a huge shock to the business and wider community, but it was not the only factor behind our drive to improve the UK's corporate governance framework.

There have been other failures too, such as the well publicised and indefensible remuneration packages for a handful of directors whose rewards are wholly unrelated to their company's performance.

The arguments for responsible Government action have been strengthened by the collapse of Enron; but all stakeholders - directors, institutional investors, individual shareholders, auditors and others - clearly have the primary day-to-day responsibility for effective Corporate Governance.

And I know that boardrooms up and down the land, and representative organisations - the Institute of Directors, CBI, the institutional investors, the accounting and auditing bodies and others - are closely engaged in the debate, and in striving for higher standards.

So what is the Government doing? First, we are committed to modernising company law - so that the UK has a legal framework attuned to the 21st, not the 19th, century. In the 19th century our system of company law gave us a massive competitive advantage, but after 150 years of case law, and amendments, it is now a competitive disadvantage.

The Company Law Review reported last year and made a series of wideranging recommendations. The Government is considering these in detail and will be consulting shortly on draft legislation.

One of the key proposals, which has been widely welcomed, is a statutory statement of directors' duties to provide clear general guidance on duties and obligations. The role of non-executive directors is also of major importance, which is why we have asked Derek Higgs to lead an independent review to examine both their role and effectiveness - looking at broadening the talent pool and ensuring the highest levels of corporate accountability.

Following extensive consultation, we intend to lay regulations on directors' remuneration shortly. These will deliver greater transparency and will require listed companies to put their policy to an annual vote. This will give investors and shareholders the power they need to tackle abuse.

As I have said previously on this particular issue, I will always support big rewards for business success. But rewards for business failure are an insult to employees who are losing their jobs - and damaging to the reputation of business as a whole.

As a direct result of the Enron scandal, we are also ensuring careful co-ordination of the work being done by key regulators such as the Financial Services Authority and the Accountancy Foundation - to ensure that our approach to accounting and audit regulation is as thorough as the demands of modern corporate life require it to be.

These actions represent only a part though, I hope, an important part, of the overall challenge. What really matters is the quality and effectiveness of the discussion in every boardroom, and the quality and effectiveness of relationships between companies and their shareholders.

I believe that the UK's guidelines for corporate behaviour are some of the most effective in the world. However, I also believe that there is more we can do - to empower shareholders, to root out illegal and improper practice and to ensure that non-executive directors are performing the valuable role they should be.

We cannot be complacent. An Enron-type scandal may be less likely to happen here because of the procedures we have in place, but it does not mean we are perfect.

In short, I want to take the United Kingdom's corporate governance arrangements from being one of the best in the world to being the best in the world. And this is an objective that I genuinely believe all sections of the business community should welcome.

Bad practice and improper behaviour is immensely damaging to all those companies - the overwhelming majority - that play by the rules and do the right thing by their shareholders and customers.