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Baroness Miller of Hendon: You always do!

Lord Razzall: My Lords, are the Government prepared at least to consider that idea put forward by Sir Iain Vallance?

6.35 p.m.

Baroness Miller of Hendon: My Lords, why should the noble Lord, Lord Razzall, change the habit of a lifetime?

Like the noble Baroness, Lady Hayman, I cannot declare an interest as a non-executive director because I am not one and it would not be wise to say that I was. However, that does not stop me having a view on what I believe a non-executive director should be able to do. I have been a chairman of voluntary organisations and a charity, and a director of various commercial enterprises.

Unlike an executive director, a non-executive director need not have a detailed technical knowledge of the business that he is entering. I used my experience within a very short time of becoming a member of the Monopolies and Mergers Commission. We found ourselves dealing with aspects of the contact lens business, the cost of music tapes versus compact discs and allegations of predatory pricing in bus services. It was a quick learning curve.

One of the points that I found interesting was that one entered that process without necessarily having any preconceptions. That is quite a good idea, if you are very knowledgeable as a non-executive director, if you have an understanding of administration and business, if you have integrity, if you have worked in large businesses and if you have a grasp of all the matters involved—and confidence, which is essential.

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No less important is to have the strength of character to be truly independent of the main board—particularly as you may possibly have an overbearing chairman or managing director. It is your job to look round and see what is going on. You need not be frightened to open your mouth and say what you think and, if necessary, have the strength of character to do something about it.

With those personal views in mind, I read with interest Mr Higgs' job description of a non-executive director. While I have no difficulty in agreeing with what he calls "the key elements" of the functions of a non-executive director—under the headings: strategy, performance, risk and people—I do find it strange that it is suggested that he should also,

    "provide entrepreneurial leadership . . . ensure the necessary financial and human resources".

I thought that entrepreneurial leadership was the province of the executive directors in the day-to-day operation of the company. Otherwise, there would be no difference between the two types of directors; and the non-executive director would have onerous duties and responsibilities without the powers vested in the main board. I think that that is quite dangerous.

Perhaps this is the right moment to congratulate Mr Higgs on the speed with which he conducted his consultation and produced the report, right on schedule as promised. Similarly, Sir Robert Smith and his colleagues are to be congratulated on their comprehensive report of their inquiry, commissioned by the Financial Reporting Council, which was published at the same time as the Higgs report.

When the report was presented to the other place on 29th January, my honourable friend the Member for South Suffolk, gave it a general welcome—which, I suppose, puts me on that side of the fence. He did, however, mention a number of matters that are of great concern to us—I suppose that puts me on the other side of the fence. His points were not fully answered then, but I hope that the Minister will be able to answer them when he replies. I shall come to them later.

The Secretary of State announced in another place that the Auditing Practices Board should,

    "take over from professional bodies the responsibility of setting standards for objectivity and integrity".

She said, furthermore, that there would be a new professional oversight board in place of the Ethics Standards Board, and that,

    "a new independent inspection unit, located within the FRC, should take over from the professional bodies responsibility for monitoring audits of listed companies, major charities and pension funds".

Thirdly, the Secretary of State said that,

    "the long-delayed investigation and discipline board should come into operation quickly".—[Official Report, Commons, 29/1/03; col. 883.]

She promised that the package should be implemented as soon as possible, with changes to the regulatory structure being made immediately.

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An implementation steering group has been set up which includes the noble Lord, Lord Borrie. I am sorry that the noble Lord is not in his place. I hope that we shall have some news of progress and a possible timetable for completion of that implementation. That does not mean that I want everything done quickly, as the noble Lord, Lord Barnett, said, but it would be nice to know whether the Government have any ideas on the matter.

How do the Government intend to implement those parts of the Higgs report that they accept? The urgent need for clarification on the mode of implementation arises from the fact that articles in the press during the weekend made it clear that the report has not been received with undiluted enthusiasm. In fact, that may be an understatement. For example, we found a quote that said the Tesco board left Higgs on the shelf. The Times business section carried the headline, "Top chairmen condemn Higgs". The Daily Telegraph headline said, "Top chairmen close ranks against Higgs". It may not be possible to achieve a voluntary code of practice, which is why I asked what the Government intend to do, how they intend to do it, and when.

I now come to our reservations about the report. We agree with Higgs, and disagree with the CBI, on the matter of separating the roles of chairman and chief executive officer. That is a useful proposal, enabling one to keep a check on the other. However, one size may not suit all, and in small companies which have a history, or in a family company, that should not be across the board. In many companies, it has proved successful to have one person doing both jobs. Neither Mr Higgs nor the Government should override the wishes of shareholders. If the Government intend to legislate on that point, there should not be an absolute prohibition. That would be pretty awful.

In this country, we can congratulate ourselves on a regulatory regime that is better than most in the world of commerce—including, and especially, that of the United States, which has been the home of some recent major financial scandals. Of course, we have also had problems with companies such as Barings and Marconi. A sharp tug on the reins by a non-executive member might have prevented those difficulties from occurring. I refer not to the problem of fraud, but to things that have not been run properly.

It is regrettable that no amount of regulations, ethical standards or codes of professional conduct can prevent the consequences of greed, corruption, incompetence, folly and, in some cases, fraud. In the end, the best safeguards for companies' shareholders, workers and creditors, is the integrity and conscientiousness of those in the position of authority. There is nothing better than that—it is a very good thing.

My honourable friend Tim Yeo pointed out in another place that,

    "any change to existing practice must be scrutinised for its effect on Britain's competitive position and whether it makes wealth creation easier or harder".—[Official Report, Commons, 29/1/03; col. 884.]

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Self-regulation should be the preferred option for professions such as accountancy.

The Secretary of State told my honourable friend that the new regime would not apply to the alternative investment market companies, and did not reply to his query about the regime's application to foreign companies listed in London. Surely, that is a loophole. Why is it thought that investors, workers and creditors of that kind of company are less deserving of protection?

We share the concerns of the CBI about the recommendation that shareholders should have the right to meet with the so-called senior non-executive director. If something is going wrong, the board should be involved at that level, not one individual senior director. The CBI thought that might be divisive in the board; I believe that it probably would, and I am not sure how it would help in the long term.

Higgs also made the suggestion that half the board should be non-existing—I mean, non-executive—directors. They had better exist, or we would really be in trouble. We do not believe that half the board is a practical proportion for the smallest of companies. We suggest that smaller companies would exclude companies outside the FTSE 350.

In conclusion, in common with other noble Lords, I thank the noble Lord, Lord Brennan, who introduced this important debate on the Higgs and Smith reports. We have had the opportunity to scrutinise and discuss them in a way in which Members in another place have not. As the noble Lord, Lord Razzall, said, we may not have reached agreement, but it justifies your Lordships' House as a democratic forum that we can discuss these matters.

Lastly, this country has a reputation for financial integrity and probity. Despite the occasional breaches by the odd rogue or villain, that makes us still an important world financial and commercial centre. We hope that the strengthening of controls as recommended in the Higgs report, without imposing impractical or impossible restrictions, will enhance our reputation and help to add to the wealth of the nation by encouraging investors and institutions to base themselves in our country.

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