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Companies Bill [HL]

moved, That this House do disagree with the Commons in their Amendment No. 245, but do propose Amendments Nos. 245A and 245B in lieu— 245A Page 183, line 35, at end insert ““; and subject to subsection (11), information about persons with whom the company has contractual or other arrangements which are essential to the business of the company.”” 245B Page 184, line 16, at end insert- Nothing in subsection (5)(c) requires the disclosure of information about a person if the disclosure would, in the opinion of the directors, be seriously prejudicial to that person and contrary to the public interest.”” The noble Lord said: My Lords, we come to Amendment No. 245 and the other amendments in this group—Amendments Nos. 245A, 245B, 245C, 245B and 246—on the business review, on which there has recently been much press coverage. In my view, this issue has not been debated with quite the degree of clarity for which one might have hoped. It is right therefore that this House should be able to debate the issue. I am also glad of the opportunity to provide further clarification about the Government’s intent and about the revised amendment that we now propose in its place. Let me remind noble Lords of our policy and overall aims. The Government are committed to improving both company reporting and transparency. We believe that one of the most important ways in which directors will be accountable is through improved corporate reporting. It is important to stress that we have made great progress to bring together commercial success with sustainability in the Bill. The business review goes hand in hand with directors’ duties and is key to encouraging directors to provide meaningful, forward-looking information for shareholders, without imposing disproportionate burdens on business. On Report in another place, the Government introduced Amendment No. 245A to Clause 399, to require quoted companies to disclose information on contractual and other arrangements essential to the business. The Government now propose to elaborate on the new provision in order to ensure that such information cannot be misused by animal rights extremists. That is the purpose of Amendment No. 245B. Some may accuse us of watering down the amendment that we originally tabled in another place, which is not the case at all. Clearly, we do not want the new requirement to disclose information on contractual and other arrangements to be exploited by animal rights extremists. But it is also important that narrative reporting from business is meaningful and shows the risks as well as the opportunities facing a company. The revised amendment strengthens the provisions by allowing directors to omit information about a person if, in the directors’ view, it would be, "““seriously prejudicial to that person and contrary to the public interest””." We believe that that is the right way forward. Let me explain how we arrived at that point. Throughout the passage of the Bill, Ministers have continued to consult and listen carefully to representations from all parties. We tabled amendments to the Bill in another place to reflect business views on the position of company secretaries, the liability regime, and a raft of technical amendments suggested by business groups. As regards the business review, a number of interests were also lobbying consistently to strengthen the provisions for a higher level of audit requirement and for reporting standards with statutory backing—we will be debating that again when we come to the amendment tabled by the noble Lord, Lord Razzall. They were also lobbying to extend the explicit requirements for quoted companies to all large and medium-sized companies, to remove exemptions for medium-sized companies from reporting non-financial key performance indicators and to disclose information on the supply chain. Adding an explicit requirement for quoted companies to report information on contractual and other arrangements essential to the business is one change that we believe will add value to the quality of the reporting without imposing disproportionate or onerous burdens on business. That is entirely in line with the Government's key agenda on better regulation and sustainability. Let me provide some clarity on what the Government expect to be reported in the business review. This is not a requirement on companies to list their suppliers and customers, or to provide detail about contracts. The provision is about reporting significant relationships, such as with major suppliers or key customers critical to the business, which are likely to influence, directly or indirectly, the performance of the business and its value. It is for the directors to exercise judgment on what is necessary to report. They need only include information to the extent necessary for an understanding of the development, performance or position of the business. Let me illustrate that with some simple examples. Where a company provides the vast majority of its products or services to one customer, the arrangements might well be essential and therefore disclosable, particularly if the company could not be sure of finding an alternative buyer for its product. Similarly, where a company relies on a single supplier for a key component, so that, if that supplier went bust, that would have a serious impact on the company’s business, then that too would be disclosable. But where a company is buying products or services from a number of suppliers, or could switch suppliers, then it is much less likely that it would be necessary to disclose details of a particular supplier to give an understanding of the development, performance or position of the business. Similarly, if a company has a wide market of customers, then the directors might judge it unnecessary to disclose information about any particular customer. Some have complained at the disproportionate burdens that this provision imposes on companies. We disagree. The provision is identical to a similar one in the original OFR legislation, which was discussed widely at the time. As I said, this is about reporting key relationships—for example, with customers, suppliers, key employees and regulators for companies in regulated sectors—not exhaustive lists. The cost implications are minimal, based on cost estimates provided by the CBI and others at an earlier stage. Furthermore, when my right honourable friend the Minister for Industry and the Regions and I met representatives of the CBI and other business organisations on Monday and Tuesday this week, they were reassured that this requirement was not about imposing big reporting burdens on companies. As Miles Templeman, director-general of the Institute of Directors, was quoted in the Financial Times the next day as saying: "““We’ve now had a period of consultation which we weren’t able to have before this clause. We believe that the intent is not to bring out a whole new raft of bureaucratic work and regulatory burden””." While business groups were seeking clarity behind the Government’s intent, they were very certain that they did not want statutory standards. However, there were concerns about animal rights extremists. The intention behind the revised government Amendments Nos. 245A and 245B is to deal with legitimate concerns over animal rights terrorism, although the amendments are not confined to that and could deal with other similar cases. The concern was that, if a quoted company engaged in animal testing disclosed, for example, who its key customers or suppliers were, that could seriously prejudice the interests of those customers or suppliers, who could then be targeted by animal rights activists. That is why the Government’s amendment is framed in the way that it is—to exempt directors from disclosing information about a person if disclosure would, in their opinion, be seriously prejudicial to the interests of that person. Disclosure must also be contrary to the public interest. The intention of the requirement is to ensure that the exclusion is not used to cover up wrongdoing on the part of suppliers. For example, if a supplier supplies dangerous goods and may be negligent in doing so, it is clearly not in the public interest to conceal his identity. We are not seeking to exempt the directors from reporting information that would be prejudicial merely to the company. Our view is that that would create an unjustifiable let-out and that it is not necessary to do so to ensure that the interests that we are concerned to protect are covered. We have considered a number of scenarios. If a contract with company B is essential to company A and there is a clear risk that company B will be unable to continue to meet its obligation, we think it right for the shareholders of company A to be made aware of the risk, whether that risk is from animal rights extremism or otherwise. However, in most cases, there will be no reason to explain why the risk arose. It is the effect on the reporting company that is important. If it were necessary to disclose, then it would almost certainly be prejudicial to the supplier. We are also conscious that it could be damaging to a reporting company if it were known that it was in a relationship with a company engaged in animal testing. In very many cases, that will not need to be disclosed as it will not be essential to the reporting company’s business. But if it were essential, we think that the prejudice would be not only to the reporting company but to the other company, because it would lose the business if the reporting company had to withdraw. Alternatively, the threat might be that the other company would be boycotted if it continued in the relationship. Again, that would prejudice the other company. In effect, it would force the other company to choose between the reporting company and its other customers. Therefore, after considering the matter carefully, we believe that all the cases that we want to cover are covered by an exclusion for prejudice to persons other than the reporting company. As I said, we believe that an exclusion for prejudice to the reporting company itself would go too far and enable things which should be properly disclosed to be concealed. Moved, That the House do disagree with the Commons in their Amendment No. 245, but do propose Amendments Nos. 245A and 245B in lieu.—(Lord Sainsbury of Turville.)