Hewitt to transform 'the ugly face of big business'

The WorldCom affair: reform planned in Britain as $4bn accounting scandal at telecoms company holds America in thrall

Jason Niss
Wednesday 04 December 2013 04:10
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Patricia Hewitt, the Trade and Industry Secretary, will this week signal that a massive revamp of company law is likely to be placed in front of Parliament before the end of this year. Her plans to shake up the accountancy profession will be revealed next month.

Speaking exclusively to The Independent on Sunday in the wake of the revelations of fraud at US phone giant WorldCom, Ms Hewitt said that the scandal showed the "ugly and unacceptable face of big business", adding: "Investor confidence, particularly in the US, has been very badly shaken by the events at Enron and now at WorldCom and the fear that there will be other stories out there."

Ms Hewitt said she did not think that the structure of business itself was corrupt or that the WorldCom and Enron scandals indicated there was anything fundamentally wrong with modern business practice.

"This has shown that a small number of individuals – criminal and greedy individuals – at a small number of firms can do enormous damage to business and public confidence," she said. Ms Hewitt argued that the tougher accounting standards in the UK meant an Enron or WorldCom scandal was unlikely to take place here, but said she was not complacent. "It would be very silly to say things could not go wrong, but the situation in the UK is very different from that in the US."

However, after the Enron scandal broke, she and the Chancellor, Gordon Brown, put together a working party to look into the issues raised by the affair. The group, led by financial secretary to the Treasury Ruth Kelly and corporate affairs minister Melanie Johnson, and including accountants and regulators, is due to present its interim report next month.

Ms Hewitt said she did not want to pre-empt what the working party would say and pointed out that it was not at all certain that its recommendations would lead to immediate action.

"It is very important that we don't rush into ill-thought-out changes in the hope of preventing something that was going on at Enron and WorldCom in the USA."

However, there are a number of moves afoot to deal with concerns about the way business is carried out in the UK. Last week Ms Hewitt said she would ensure that the remuneration packages of senior executives were voted on by shareholders annually so as to avoid what she calls "big rewards for big failure".

A review of the role of non-executive directors is under way under the guidance of former merchant banker Derek Higgs. Ms Hewitt indicated that this could lead to substantial changes as "modern businesses are becoming so complex that the traditional role of the non-executive director is becoming impossible to perform".

She dismissed concerns about Mr Higgs' large number of directorships and potential conflicts of interest, saying she had the utmost faith in him.

And an even more fundamental change to British business will be signalled by Ms Hewitt in a speech at Cambridge University on Friday. She will say that the Government will incorporate the findings of last year's review into corporate law in a new Bill which will sweep away the old Companies Acts and replace them with a legal framework suitable for business today.

"British company law in the 19th century was a source of competitive advantage to us. Now it is a source of competitive disadvantage because it has become so encrusted over time with all sorts of amendments and case law," she said.

Among the changes will be a statutory statement of the responsibilities of both executive and non-executive directors and requirements for regular operational and financial reviews. Ms Hewitt said the new law would be framed from the perspective of creating a small business and letting companies build from there.

Ms Hewitt would not be drawn on the timetable for publishing a draft Bill, though it is hoped to be out by the end of this year.

"It will be a major piece of law reform, a huge piece of work," she said.

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