Business secretary Vince Cable has announced proposals to improve corporate transparency and make reckless directors more accountable for their actions.
The idea is that by improving confidence in the UK as a place to do business, investors will pile in and boost the economic recovery.
Shining a light on opaque corporate structures is part of a commitment made at a recent meeting of the G8 countries to establish a central registry of companies’ beneficial owners. This goes along with the abolition of bearer shares and measures to tackle misuse of corporate directors and nominee directors.
Written in the light of the banking collapse, Cable’s discussion paper also sets out ways of making directors more accountable for misconduct or company failure. Regulators will have greater powers to disqualify directors with courts taking more account of the social impact of directors’ actions. Also up for discussion is whether disqualified directors should directly compensate creditors after a company collapses, be offered education before running another business and whether disqualified foreign directors should be barred in the UK.
Cable wrote in CCR Magazine in August that he does not wish to punish ‘honest failure’. As this blogger pointed out recently, some leading entrepreneurs have had businesses that failed.
In his article, Cable said: ‘I recognise that these robust powers should only be used in appropriate cases, so that honest directors need not fear sanctions where they have acted in good faith.’
Cable wants to distinguish between genuine risk taking and ‘the rogues who use “phoenix companies” to deceive customers’.
The deterrent aspect is noted by insolvency specialist TMP [Stanley: is this description correct? Nothing on the Directors Under the Microscope article to say] which says the changes ‘could encourage directors to consider seeking advice to avoid pitfalls with the risk of trading when insolvent’.
But, says TMP, while the rate of disqualification is an issue, ‘the legal framework already exists to punish delinquent directors’.
That’s an argument taken up by Katja Hall, the CBI’s chief policy director, who said: ‘We back the broad drive for greater trust and transparency to promote more responsible capitalism but this must be proportionate without adding extra red tape for the sake of it.’
Tough sanctions
Hall says Cable risk taking a piecemeal approach, with directors having different responsibilities according to their business sector.
She said: ‘There are already tough criminal sanctions for those who engage in fraudulent behaviour and powers to clawback pay from individuals if they are found to have mis-managed a company. The priority should be enforcing laws which already exist, rather than introducing a raft of new bureaucracy.’
There is a more positive response to Cable’s paper in an article for Guardian Professional by Roger Barker, the director of corporate governance and professional standards at the Institute of Directors.
He welcomes the proposals for transparency to prevent unscrupulous individuals from hiding behind a corporate veil and ‘allowing shareholders, regulators, tax inspectors, and others, to hold businesses to account’.
The number of directors who don’t follow the rules is, he says, very small. He quotes Department for Business, Innovation and Skills figures showing that each year ‘about 1,200 directors of insolvent companies are disqualified for up to 15 years and around 90 directors are prosecuted for criminal behaviour in relation to the management of a company’. There are, he points out, more than 2.6 million companies in the UK.
Barker says his one concern is that the register of beneficial ownership may not be opened up to public scrutiny. ‘Instead, it may be decided that it will only be available to the authorities who are unlikely to have the resources to sufficiently police it.
‘If and when it is introduced, the register should be in the public domain and open to scrutiny by everyone to maximise the spirit of openness. Sunlight is the best disinfectant.’
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