Wednesday, 27 May 2009
Seanad Eireann Debate
Senator Ciaran Cannon: I welcome the Tánaiste back to the House and hope we can continue in the same spirit of co-operation that was the hallmark of our previous debate. This amendment is about striking a balance between awarding the Director of Corporate Enforcement the powers he needs to carry out his duties and not frightening off anyone from getting involved either in entrepreneurial effort or becoming a company director. This amendment seeks to strike that balance. In section 8, subsections (11) and (12), the pendulum has swung too much in favour of the Director of Corporate Enforcement. It provides that directors of companies who fail to comply with the disclosure requirements provided for in section 41 shall be guilty of a criminal offence. Subsection (12) provides a defence for subsection (11). It appears the usual burden of proof has been switched and that it is for the company director, the accused, to persuade a court he or she took all reasonable steps — that is the phrase used — to secure compliance once the facts of defective disclosure and the fact of him or her being a director are established. What would this mean in practice for a company director? A company director may not have the time or resources to check whether all the accounts in this respect are accurate. The director must ensure the company employs financial personnel to carry out these functions and, furthermore, that the auditors are properly informed regarding all relevant matters.
In the recent past, we have discussed decreasing the financial and administrative burdens we place upon companies, especially small, fledgling, indigenous companies. Obliging directors to engage in this sort of activity would not lead us in that direction. I do not believe a company director can be expected to carry out detective or sleuthing work in his or her own company to ensure every single potential conflict-of-interest transaction is disclosed. I would have thought that is a most unfair burden to place on a company director. In general, criminal law should penalise actual wrongdoing, rather than providing for guilt by association, as is most certainly the case in these two sections. The burden of all reasonable steps would appear to require a level of performance from directors that is substantially higher than simply being non-negligent. This burden leaves every director exposed to criminal sanction unless this very high — and I have to say, not very easily defined — standard is met. Apart from criminalising conduct which may not be errant or wrong in any conventional sense, it will provoke substantial board resolutions detailing the process followed. More often than not, it may pay lip service to disclosure so as to provide for a defence without having any real effect in rooting out corporate wrong-doing, which is the Bill’s ambition. The focus should be on a director who has failed to disclose the conflict-of-interest transaction, and only that director, with a clearly defined offence and an appropriate penalty.
In respect of a number of amendments that we have already tabled, the Tánaiste has undertaken to re-examine certain elements of the Bill and revert to us on Report Stage. I ask that this should also be done with regard to these two subsections.
Tánaiste and Minister for Enterprise, Trade and Employment (Deputy Mary Coughlan): Recalling what I said on the last occasion in response to amendment No. 16, I made the point that the new subsection (12), which immediately follows the amendment before us, provides a defence for anyone who is a director of a company in question. My view is that subsection (12) will provide the adequate defence to which the Senator referred. He also mentioned family situations in which people may not have had knowledge or due cognisance of anything, but without a doubt the necessary safeguards would be consistent with the requirements of the House. The Senator also referred to section 383 of the Companies Act 1963, which dealt with officers in default. In this instance, the defence provided for in section 383, would be different from that now provided for in the new section 40 of the Companies Act 1990, which is inserted by section 7 of the Bill before us. I appreciate the debate we have had, but my intention is to give due regard to people who may not necessarily be dealing with such issues on a day-to-day basis. Having analysed this matter since we last discussed the Bill, I am satisfied the approach contained in section 8, specifically regarding the insertion of a new subsection (11) and the related defence of subsection (12), is appropriate and consistent with the wording of the existing related provisions. Although I appreciate the crux of the Senator’s argument, I feel subsection (12) gives the necessary safeguards. In my definition of this matter, I am satisfied that defence mechanism is there.
|Brady, Martin.||Butler, Larry.|
|Callanan, Peter.||Callely, Ivor.|
|Carty, John.||Cassidy, Donie.|
|Corrigan, Maria.||Daly, Mark.|
|Ellis, John.||Feeney, Geraldine.|
|Glynn, Camillus.||Hanafin, John.|
|Keaveney, Cecilia.||Leyden, Terry.|
|MacSharry, Marc.||Mullen, Rónán.|
|Norris, David.||Ó Domhnaill, Brian.|
|Ó Murchú, Labhrás.||O’Brien, Francis.|
|O’Donovan, Denis.||O’Malley, Fiona.|
|O’Sullivan, Ned.||O’Toole, Joe.|
|Ormonde, Ann.||Phelan, Kieran.|
|Ross, Shane.||Walsh, Jim.|
|White, Mary M.||Wilson, Diarmuid.|
|Bacik, Ivana.||Bradford, Paul.|
|Burke, Paddy.||Buttimer, Jerry.|
|Cannon, Ciaran.||Coffey, Paudie.|
|Coghlan, Paul.||Cummins, Maurice.|
|Fitzgerald, Frances.||Healy Eames, Fidelma.|
|McCarthy, Michael.||McFadden, Nicky.|
|Quinn, Feargal.||Regan, Eugene.|
Deputy Mary Coughlan: Section 10 of the Bill is amended to allow companies which are in a holding company or sister company relationship with a company that has a real and continuous link with economic activity in the State to register in Ireland. The previous wording allowed only those in a subsidiary relationship to such companies to do so but following examination and consultation with the Revenue Commissioners this was seen to be too restrictive.
An Leas-Chathaoirleach: Amendment No. 18 is in the name of Senator O’Toole. Amendment No. 19 is consequential on amendment No. 18. Is it agreed that amendments Nos. 18 and 19 may be taken together? Agreed.
I will put this amendment into context, which has to do with the debate on light touch, heavy handed legislation and so on. What I propose addresses a number of issues. First, it raises the threshold under which companies are required to come in under the new section I propose. As a result, fewer companies are tied into it. Second, it requires directors to disclose material facts which they know. Materiality will be the judgment call for themselves at the time. Third, it requires the auditor to sign off on that. That is what I propose in broad terms.
In terms of what I am proposing, on four or five different occasions while we were going through the Bill the Minister referred to the Office of the Director of Corporate Enforcement to support her argument. She referred to his office and to him time and again in the Committee Stage debate, in response particularly to Senator Cannon’s issues. What I have put before her today is precisely, down to the comma, what the Office of the Director of Corporate Enforcement proposed to the company law review group. On that basis alone it is an open and shut case. This is similar to how one deals with the issue politically. I am putting before the Minister something from the office on which she has relied for all her argument to date, and I believe she should accept it. She should not tell me about the companies Bill, with its 1,350 sections or whatever, she will bring in next year.
During the time of the rows about offshore accounts, when the banks queued up to appear before the Committee of Public Accounts, the argument they put forward time and again was that they did not know. Even though I agreed with the argument made by Senator Cannon on the last amendment, I found it difficult to support what he was saying because it put an onus on directors to find out, or put in place the structures to find out, the position. That is probably the argument he was making also in trying to introduce balance into it. He felt the balance went too far, and made a plausible and cogent case which I did not support subsequently because I felt the argument was more on the Minister’s side.
In terms of what I am saying in the amendment, I am reminding the Minister that her predecessor as Tánaiste, the Minister for Health and Children, Deputy Mary Harney, went into the Committee of Public Accounts. I sat beside her. We put forward the proposals on the report of the audit review group and at least six times during that speech she said she never again wanted to hear anybody use the argument that they did not know as an excuse for not dealing with it.
We then had the business to do with Anglo Irish Bank some months ago. The Minister will recall that the day after that blew up all the discussions were on whether those people could be brought to courts and if they were in breach of company law. There was only one voice, Professor Niamh Brennan, a member of the audit review group, who took a different view to that of everybody else. Her view was that there was an issue of the common law based on company law. I made reference to that earlier. The common law is as important as the written company law in many cases. If this issue is moved forward, and I do not want to get into individual issues in individual banks, common law will become very important but if what I am proposing had been in place, that legislation could be used in such a case because there was at least one director who had been a chief executive and a chairperson and who could not deny he did not know the information. It was clearly a question of making a judgment call and the judgment call in respect of what is available currently is whether there is something in place to ensure people are staying within the laws of compliance whereas under what I propose they must say it is appropriate to the needs and that it is material. That is the fallout position on it.
The Minister may choose not to support this amendment but I am proposing what was supported by the Committee of Public Accounts and what was put forward by the Office of the Director of Corporate Enforcement. I am not on my own in this regard. This is not just a throwaway amendment, so to speak, from an Independent Senator. I am speaking Government policy, Committee of Public Accounts policy and the Office of the Director of Corporate Enforcement policy.
This amendment requires us to put in place what people expect us to do. I do not expect it to get one word of coverage from anybody in the Irish media who would be far too lazy to spend any time trying to work out what it is I am saying. They would not bother their heads. I have written to the joint committee on regulation asking it to support this measure. It will not do so but it allows me to say when I am next in the committee that it had the opportunities and it cannot whinge the next time company law is not strong enough to deal with errant directors or that some measure is not in place.
In terms of what I am proposing, the current legislation is section 45 of the 2003 Act, which amends section 205 of the 1990 Bill. We had this debate in 1990. I believe Declan Purcell was the adviser on that occasion. I saw him on “Prime Time” last night. I believe he would still share my views on this issue.
I believe the gods are on my side on this issue. The Minister is in a lonely position in regard to it and nobody will thank her if she does not accept the amendment. This is a simple amendment which also makes the position easier for company directors. It reduces the number of companies involved in it and it makes it easier for them. I am removing large amounts from what is in the legislation currently but the main thing I am doing is this. A section in the current Bill states: “It confirms that the company has internal financial and other procedures in place that are designed to secure compliance”. What I am proposing was very close to what was in the original Bill published by the Minister’s Department in 2003. Of course, when company directors were required to state to the public that they had put in place something which was secure or material and so forth, there was an outcry from IBEC, various other directors’ groups and from what was then called the “big five” accountancy bodies. As the world knows, the big five has been reduced substantially in the meantime. It is down to three at present and getting smaller, due to their involvement in Enron and various other matters.
What I am proposing was in the original Bill, and in that case the Minister and Tánaiste of the day, Deputy Mary Harney, was forced to concede. Pressure was brought on the Government to introduce this. There has been no debate on it in the intervening period but this is what is there. Many of the people, incidentally, who were complaining about the lack of regulation and legislation to deal with Anglo Irish Bank are the people who did not support what they should have supported in 2003. What is stated at present is that the legislation and procedures are designed to secure compliance, but the amendment uses the phrases “confirming that the company has in place a compliance policy statement that is, in the opinion of the directors, appropriate for the company” and “confirming that the company has in place appropriate procedures...designed to secure compliance”. In other words, the directors will make a value judgment that what they have in place is appropriate for the company.
I am sorry to repeat my point but I have a reason. This provision is not nearly as harsh as the Minister’s last amendment about throwing people into jail. This is about company directors doing what I believe they should. When I put forward this proposal in 2001 and 2002 as chairman of the audit review group to the Government, I honestly did not believe I was raising the bar. I believed that the limited liability which this democracy grants to company directors was a privilege and that the least we were entitled to get in return were declarations on any issues that were material and that the directors would act in compliance with the law of the same democracy that gave them their privileges. I will argue with any group, accountants or otherwise, who say this provision is harder on directors. It is not. It puts one duty on directors — it makes them form a judgment.
What does that mean? How does it work in real terms? Let us say the company falls apart and the directors are brought before a court on the basis of this legislation. They will have to stand up and say they were directors of that company; that as directors they ensured the process was explained, put in place and reviewed each year, as is required in the provision; that they got a report every quarter or six months to the effect it was being implemented and the company was compliant; that they ensured it was put in place and that they got a report; and that they cannot be held responsible for some errant person somewhere else who was acting fraudulently. It must be stressed that this amendment is not like the Minister’s last amendment; it does not throw people in jail for something about which they could have known nothing. It effectively provides that the directors act proactively and positively to put in place a system to ensure they are paying their taxes, that the books are a fair and accurate reflection of what they are doing and whereby the directors can form a judgment that they acted as fairly, honestly and correctly as possible in the spirit of and as required by the legislation.
That is what is required of the directors. The next part of the amendment applies to the auditors. What is required of the auditors? One need only reflect on events two months ago when the Anglo Irish Bank problem hit the fan and people were asking about the role of auditors. We know the role of auditors. I must declare an interest because I am a director and member of the Irish Auditing and Accounting Supervisory Authority, so I have been immersed in this issue. In my view, the auditor is a watchdog, not a bloodhound. The same applies to the directors. It is not the case that a director must chase around every office or sub-office of the company to find out if everybody is acting honestly. One can only require the director to do what is appropriate for a director. Directors are not managers, nor should they be required to spend millions of euro on consultants to get this information, as was argued by many of the accountancy bodies at the time, including the big five. They should spend no more than would reasonably be required to put reasonable and practical mechanisms in place to ensure they comply with the law. If the company is Anglo Irish Bank, for example, giving out over €100 million in loans to directors and telling nobody about it, the directors would be required, under this amendment, to disclose anything material and would be required to be told of anything material. There are, therefore, two bites of the cherry.
Let us say the directors are before the judge and are asked what the auditor does. The amendment uses the phrase “in the auditor’s opinion”. The auditor must form an opinion or make a judgment. What I am seeking through this amendment is that both directors and auditors form judgments. What else are they paid for? What else are they doing in the company?  Auditors are the bridge between the company in business and the rest of us. They tell shareholders in the company they are auditors and not part of the company; they have read through the books; and the books are a true and fair reflection of the accounts. They say the same to the Minister, the Revenue Commissioners, the Department of Finance and the political system. The amendment provides that where the auditor forms an opinion that the directors failed to prepare or cause to be prepared a directors’ compliance statement or where they failed to include a compliance statement in line with others or where they made a compliance statement which was either false in a material particular or made recklessly, the auditor must report that to the Director of Corporate Enforcement.
I can predict the argument that will be made against this provision. It will be against the use of the word “material”. Every accountant, trainee accountant and accounting technician knows what “material” means. Can it be defined? It probably cannot; it is one of those mysteries of accountancy. It is like asking somebody to define an elephant. One cannot, but one knows it when one sees it. The same applies to material. One need not define it but one knows it when one sees it. If somebody is auditing a company and discovers some company directors have received loans of over €100 million which do not appear in the books, one will know it is material without ever receiving a definition of it. Generally, material in the books in accountancy terms would be at 10% but there is also the issue of its impact. As we have seen, the amount of the loans was far less than 10% but the impact was much greater than 10% in terms of profits, turnover, value, equity and so forth.
I hope I have convinced the Minister. I have tried to cover all the angles. The amendment I have put forward is exactly in line with what the Committee of Public Accounts asked of the Government in 2002. It is also in line with what was proposed by the Minister’s Department and the then Tánaiste, Deputy Mary Harney, in 2003. Furthermore, it comprises the exact words proposed by the Office of the Director of Corporate Enforcement to the Company Law Review Group some time ago. It deals with a gap in the legislation at present and requires directors and auditors to form judgments. This will give comfort to shareholders, stakeholders, customers, the Revenue Commissioners, the Department of Finance and the political system. It is a no brainer; the Minister should accept the amendment.
Senator Ciaran Cannon: Before Senator O’Toole’s contribution and after a cursory look at the amendment, I was somewhat conflicted about it. However, having heard the Senator speak, I believe he is employing a subtle and enlightened way of policing the actions of company directors. The previous amendment we dealt with is an instance of employing a machete to remove a tumour. What Senator O’Toole proposes is more subtle and skilful scalpel surgery. It suggests that this will afford company directors acting in a genuine way the protection they need from the very rare errant activity of other directors. It suggests putting in place a genuine system of monitoring the activity of all directors and allowing those who act properly to make a believable claim that they did all in their power to police the activities of their company director colleagues. I support the amendment and hope the Tánaiste will see fit to act in the same way.
Senator Brendan Ryan: From experience in industry I have some concerns. I would be interested to hear what the Tánaiste has to say. I was impressed by Senator O’Toole’s comments generally. The use of a phrase like “forms a judgment” in legislation tends to frighten me. People can argue in any forum that they formed a judgment and therefore get themselves over the line in a particular way. They can excuse themselves on the basis that they have formed a particular judgment. I have some concerns about the use of that phrase.
Deputy Mary Coughlan: The Senators have set out their position in respect of Senator O’Toole’s proposal. The recommendations that directors of companies should be required to prepare an annual compliance statement was contained in the report of the review group of auditing, of which Senator O’Toole was chair, and was submitted to my predecessor in July 2000. Section 45 of the resulting Companies (Auditing and Accounting) Act 2003 contained the relevant provision. As we all know, that section was the subject of considerable comment during the Act’s passage through the Oireachtas and significant changes were made before it was finally enacted.
Following enactment, the Office of the Director of Corporate Enforcement was requested by the then Minister of State, Deputy Michael Ahern, to develop appropriate guidance on how the provisions would be expected to operate in practice. This in turn led to the identification of a number of issues, which resulted in the Company Law Review Group being asked to examine the matter. Having conducted an intensive risk and regulatory analysis, the Company Law Review Group submitted its report in 2005. The report contained a more detailed analysis of the provision and the consequences that would flow from its commencement. One of the CRLG’s most important findings was that commencement of the section in its enacted form would give rise to a cost to industry ranging from €377 million to €692 million in set-up costs and from €202 million to €343 million in ongoing costs.
As we all know, there were divided views within the CLRG with some interests recommending the provision be simply repealed, while at the other end of the spectrum it was recommended that the section be commenced as enacted. The majority of the CLRG recommended that a significantly revised provision be substituted while a minority of members supported a revised alternative proposed by the Director of Corporate Enforcement. In the event the Government decided to accept the alternative proposal by the majority of the CLRG and that has been included in the companies consolidation and reform Bill, which is being drafted by the Parliamentary Counsel.
The amendment tabled by Senator O’Toole is, as he indicated, essentially that recommended by the Director of Corporate Enforcement and I am not in a position to accept it. I appreciate that all the arguments I have brought to the House have been on the basis of his recommendations. This is not one he brought to my attention on the immediacy or the robustness of his legislative framework. The issues I have brought to the House have been on the basis of his recommendations to assure people during this time that he will have robust legislation available to him. However, I am prepared to review the issue to ascertain whether developments since the Government last considered the matter warrant refinement in the requirement for directors’ compliance. In this regard, for example, the imminent transposition of EU directives, amending the fourth, seventh and eighth company law directives contained elements requiring reporting by directors. The alternative to a directors’ compliance statement will need to be aligned to these requirements to avoid unnecessary overlap and to remove potential inconsistencies.
I listened to what people had to say and I reread the company law reform group report. I do not wish to take from the argument that has been put to me, but at this time I am not in a position to accept it. I will read out statements that do not come from the regulatory people or the lawyers. As we all know, the food and drink industry is under severe pressure. Its main concerns were:
IDA Ireland stated that the view of multinational companies was that it would increase the regulatory burden, give the perception of less friendly business environment, increase compliance costs and reduce competitiveness. It also referred to host versus home country regulation. Its submission stated: “When multinational companies contemplate investing in Ireland they are sensitive to changes in the respective regulatory and compliance environments between their home country, Ireland and competing locations.” These are not statements from the regulatory people who, I appreciate, might sometimes look after their own agenda, but from people in industry.
This report was published in 2005 on the basis of the situation arising from 2002. I have had further discussions with the Minister for Finance on this issue, particularly as it affects the financial sector. There have been serious difficulties in the financial sector in the broadest sense over the years. There is existing legislation governing the activities of such companies that allows for the imposition of obligations effectively amounting to a requirement to prepare a directors’ compliance statement. Section 25 of the Central Bank Act 1997 enables the bank to require a regulated financial services provider to provide a compliance statement to the bank within a specific period. I consulted the Minister for Finance who has announced his intention to reform radically the regulatory structure for credit institutions. It would be possible for further refinements to be introduced as they would apply to financial entities.
The provision on a directors’ compliance statement as exists in draft form would contain relevant obligations of the Companies Act, which is contained in the Company Law Act anyway and in tax law. We ought to think about the other requirement that has been spoken about. I am happy to listen to other people’s arguments and my view is that we should provide the best legislation we can, which reflects lessons learnt. I have a concern about the other aspect of relevant obligation. Section 11 of the Bill refers to “any other enactments that provide a legal framework within which the company operates and that may materially affect the company’s financial statements”. In a small sense this can be considered with regard to the financial institutions. However, are we expecting a director of a company, for example involved in some kind of environmental business, to bring in a professional with that expertise to allow him or her to sign off on a compliance statement even though the company itself would be obliged under the regulatory frameworks? It is the same for the pharmaceutical industry. Are we expecting that a director, before he or she signs off on the compliance statement, needs other expertise to assure him or her that he or she may sign off? It is not just the small things, we need to think about whether this is the appropriate approach.
The second aspect is the need to bring in an auditor to sign off. Sometimes we do not make good laws when people are under pressure. There are companies that are under serious pressure. They are beating down the door about regulation and surveys and asking to have some of this eliminated because they want to focus on doing their business. Their view is that compliance means being compliant with taxation law and other appropriate laws.
I appreciate Senator O’Toole’s statement that I have received considerable guidance from the Director of Corporate Enforcement. The Senator must appreciate that, in the context of this legislation, which is almost an emergency Bill, the director did not raise this issue arising from his investigative work. I require convincing that the proposed measure is necessary. I regard compliance statements as necessary but I do not want to subject companies to excessive regulation.
The threshold set in the legislation is high. While it is important to have expectations of directors, as politicians we must also consider the likelihood that an insufficient number of people will be willing to become directors of companies because it will not be worthwhile for them to do so. We must strike a balance at this difficult time. Ireland is a small country and only a limited number of people have the capacity to do things.
Members frequently argue that politicians should not be discouraged from participating on boards. I am not sure this is the right time to accept the amendment. I remain open to argument, however, and I will leave open the door for further discussion on the issue. I will make a final determination on whether to proceed with the recommendation issued by the Company Law Review Group, which is a Government decision that I am not entitled to change, or whether I will bring to Government a different perspective. I am not in a position to accept the amendment.
Senator Joe O’Toole: In thanking the Minister for her comprehensive response, I gently point out that she is wrong on all points. Some of the Minister’s comments were embarrassing. I also point out to my colleague, Senator Ryan, that I used the words “form a judgment” to explain how the legislation would work and they do not feature in the Bill.
In his response to the Company Law Review Group, the Director of Corporate Enforcement described as unnecessary the proposal that a company may rely, at the director’s discretion, on internal or external advisers to secure compliance. The Minister has adopted a position in support of the Company Law Review Group’s proposal to allow the use of external and internal advisers. I concur with the view of the Office of the Director of Corporate Enforcement that such a measure would institutionalise heavy advisory costs. Those who are telling the Minister they do not want the provision in my amendment included in the legislation are the same companies which will supply consultants to ensure compliance. I share the Director of Corporate Enforcement’s view that directors should make up their own minds and should not spend money on advisers.
What did the Minister mean when she cited the examples of environmental and health and safety issues and the pharmaceutical sector? She appears to believe companies involved in these areas are not compliant. There is no other way to explain the implication in her statement that directors do not take responsibility for abuse of health and safety or environmental laws.
Senator Joe O’Toole: Is the director of a company which is dumping materials in an unauthorised dump supposed to know about the practices in which his company is engaged? Must I engage a consultant to tell me about this kind of thing?
Senator Joe O’Toole: No, it is not. The Minister has been given a false trade on this matter. I will resign my seat if she can provide information to support her contention that this measure would cost millions of euro. I have been listening to a similar argument since 2002.
We must abandon the idea that companies must engage consultants to tell then they are complying with the law. Consultants are precisely the people one does not want running a company. A publican running a company must ensure he complies with strict legislative requirements on matters such as opening and closing times, who he may employ and where he may employ them, the display of signs and so on. As with individuals running companies in other areas, he ensures he is in compliance with a check list.
The Minister’s comment on pharmaceutical companies was close to libellous. Perhaps she is unaware of the steps directors of such companies must take to ensure compliance. The requirements they must meet before signing off on anything are above and beyond those required of other groups. Pharmaceutical firms are surely the most compliant of all companies. If a director of such a company believes there is a 0.01% chance that any aspect of a medication is dodgy, the product will be destroyed.
I was informed by an individual at a briefing I received on this issue last month that he had not slept for an entire weekend because he had refused to sign off on a material that his company was placing on the market, a decision that cost his company, a large, well-known international pharmaceutical firm, €27 million. He said he had no choice in the matter because he was unable to tick all the boxes and strict criteria had not been met somewhere along the line.
I also asked a professor of business about the argument being made by the Minister. Incidentally, her argument is as old as the hills. It begins with a thesis that company directors do not bother or could not care less about environmental or health and safety legislation. This is completely unfair to decent company directors who try to cope within the law.
Senator Joe O’Toole: The Minister is arguing that company directors will have to wheel in consultants if they want to be able to state their companies are compliant with the law. We may as well close down the whole system if that is the case. That is the precise argument used in 2003 and there is no basis for it. People act within the law to the best of their ability. If my company contracts another firm to transport and dispose of materials in a proper manner in the local dump and the latter decides to dump the material at the end of a farmer’s field or in an empty quarry, I will not find myself in court provided my company has met all requirements and put in place the proper structures to ensure it is dealing with a reputable company. In such circumstances, the company cannot be held responsible for fraudulent or illegal behaviour. If we have reached the stage that we must engage consultants to establish that legislation being passed on a monthly basis in the House is being complied with, we have a serious problem.
The Minister referred to people knocking on doors because of heavy regulation but declined to comment on the fact that my amendment would raise the threshold and reduce the number of those required to be involved in the compliance process. I ask her to comment.
Does the Minister’s memory stretch back to two months ago when Members were lining up in both Houses and in committees to highlight the failure of the Financial Regulator to regulate with sufficient strength. Last week’s edition of The Economist featured a whole section of some 15 pages on how we should approach the regulation of companies. President Obama stated recently that we must strike a proper balance in a number of areas, including regulation.
I am opposed to heavy-handed regulation. The purpose of the amendment is to ensure people act honestly as our forefathers did in the past. Before legislation was introduced people did not sign documents but shook hands. One’s reputation was one’s bond. That is the way I was reared and it is how I would like legislation to work. All I seek is that people do their best to comply with the law and ensure they can show what measures they put in place to try to ensure compliance. We can demand nothing else of decent, honest company directors. We do not want them relying on consultants in big offices on Merrion Square or Fitzwilliam Square at €600 an hour to come in and tell them they are complying with the law. It is their own executive who tells them they are complying with the law. Can one imagine that companies do not have a risk audit, a health and safety person? They are supposed to have a person appointed by the company to ensure that they comply with the law in a variety of ways.
I strongly reject the contention that this is to place additional burden on the company. It is quite the opposite, but it is being presented to the Minister as such. It is for honest people to state and show that they have done their best, and for the auditor to confirm that that has happened. What is the high bar on that one? What is the threat in that to anybody? Why would any honest company director have a problem with it?
Recently, I asked a professor of business about this issue. As devil’s advocate, I put the argument the Minister put about the issue of other legislation on environment, health and safety etc. There is a long list of such legislation which I have in my office since I got all this stuff in 2003. The answer I got back questioned company directors not being responsible for having in place structures that save people’s lives or make them work more safely. The professor looked at me like I was from the Dark Ages. All I am asking for is simple, straightforward stuff.
I also want to put on record the other points the Office of the Director of Corporate Enforcement made about what the Minister is supporting. He stated that, regrettably, he could not endorse it because it means that the Office of the Director of Corporate Enforcement, as the body responsible for encouraging compliance with company law, including the preparation of books of accounts that give a true and fair view, finds unacceptable a proposal which omits reporting on obligations “that may materially affect the company’s financial statements”. That is what the Minister is supporting. The Minister’s Department is the parent Department of the Office of the Director of Corporate Enforcement which states this is the situation. That is what she is asking me to accept. The director went on to state that the provision for auditor review of the director’s compliance statement has been entirely deleted. This was a key recommendation of the audit review group in enhancing the public interest role. The director stated that the proposed definition of material compliance no longer requires that the arrangements of structures in place must be reasonably effective. We, therefore, have heard it from the Director of Corporate Enforcement.
The first time this goes wrong politicians will stand up in this House and the other House to ask why the Director of Corporate Enforcement did not get in there and do this, that or the other. The director offered his view and here we are ignoring that view. It cannot be right.
The Minister stated that she is open to dealing with this issue. I have given her the view of the Office of the Director of Corporate Enforcement, the Committee of Public Accounts and the audit review group. What does it take to change the Minister’s mind on this? If she is open to it, what does she need to hear or from whom does she need to hear on this matter? The other group which had a reservation about this section was the Revenue Commissioners, but I will not go into that. Let it be on the record that the House had the opportunity to act on this and it refused to do it or it is not doing it for issues of no relevance whatever. I appeal to the Minister to open her mind to this, to take it on board and to make it happen.
Deputy Mary Coughlan: In normal circumstances I accept the views of those who are elected in this House, particularly if they are articulated in such a way that the argument is convincing. I totally refute Senator O’Toole’s assertions that I do not know what is happening and that I do not know that companies in particular sectors must abide by the laws of this land on health and safety, licensing etc. What I articulated on this was in the context of the compliance statement. If Senator O’Toole wishes to have an audit done, in normal circumstances I would put money on it, because half the time we are talking about money, that they will not allow a director to sign off on their obligations in certain circumstances unless they have an expert opinion to allow them to do so. The argument I was making was not that a company must abide by the rules and regulations by which it is regulated no matter what the company is. That is taken as read, as said and as expected. We are specifically speaking about this.
I introduced this legislation, as I indicated to the Senator, following from the debacles that took place within the financial sector where I asked the Office of Corporate Enforcement what additional measures he wished to see in the context of this specific issue. He put them forward and I have accepted them, and these are the measures that I am putting to the floor of the House. In general, they are being accepted.
The discussion here is on different legislation, section 45, which was controversial and which has not been enacted. I have taken the past year in familiarising myself on the company law side. There are issues that I have asked to be considered so that when I come back to the floor of this House in approximately a year’s time or less, I will have formed an opinion and briefed a Government to form an opinion to bring certain measures to the floor of this House and to the Lower House.
I say to the Senator is that there is an argument out there, and that argument has been articulated by Senator O’Toole and three other speakers. There is a majority who are against this. However, since 2005 matters have changed. I give an undertaking here publicly that I will take on board Senator O’Toole’s views — we can have further discussion privately later if necessary — and ask the CLRG for a review. It will not be an overall massive review because it has a considerable amount of work to do, but I will speak to the chairman. I spoke to congress on a number of issues of company law and it has articulated its views. I will speak to Mr. Paul Appleby’s office again before I make a final decision on what I think would be the best recommendations to put to the floor of the House and discussed further because it is huge legislation. I would prefer not to be put in a position where I would be expected to accept this amendment in a vacuum of the overall revised company law legislation that I would like to bring to the House.
Senator O’Toole made a fair argument and I would like to consider that argument, to hear what the Lower House will say on this issue and then form an opinion where I would come back to the floor of the House with my recommendations and have further opportunities. It is a process and much work has been done on company law. We will have further discussions with the relevant parties and bodies, and a final determination will naturally be made on the floor of the House.
I am not rejecting this. My preferred option is to consider it further and that we would bring back to the House what we wish to see in an amended section 45 so we can bring the matter to finality. Obviously, it has been very controversial on the basis that since 2002 this matter has not been brought to finality. I do not think I am being unfair. I would like to bring to the House the best legislation but on the basis of what we are specifically doing here, my view is that we should consider it further.
On the issue of the amount of money, Goodbody Economic Consultants were asked to deal with that, and I am sure Senator O’Toole has the CLRG recommendation available to him. I can only be guided by what has been brought to my attention and what has been articulated by the majority of the CLRG. I cannot accept the amendment but that does not deter me from reflecting on the thrust of the discussion in the House.
Senator Joe O’Toole: I thank the Tánaiste for going through that. I do not know why she felt I had criticised her personally. If I did, it was not my intention. I do not take that road. I hold the Tánaiste in the highest regard and I do not need to go down the road of personal criticism, as she well knows.
The Tánaiste has crystallised the point of disagreement between us. She cannot stand over a situation in which directors must get advice from lawyers, consultants or whoever it was she mentioned before they can sign off on something. It would be neither acceptable nor necessary. If one runs a company, one puts structures in place and does one’s best. That is the end of it. If we are passing legislation that outlines the requirements in question, we must revisit all of it. This is where the costly heavy touch and over-regulation come into play. The section appears to imply someone can be a company director for a year and sign off on meeting after meeting decisions with which people are happy, until the day on which he or she must sign off on a compliance statement.
I chair a number of finance committees. A finance committee goes through a matter and reverts to the board with its case about which the board asks questions. An element of trust is involved, just as there is with a board’s audit sub-committee. Companies of the size in question have audit committees to go through the issues in question. It is the case that, somewhere along the way, a director will ask what is in place to ensure a company complies with health and safety, environmental or other regulations. The company will receive a report. We are not saying the company director must spend the weekend going through what was put in front of him or her. The director must have trust and confidence in the report, which is all a court can ask of him or her. The director formed an opinion based on the putting in place of what he or she considered to be appropriate structures.
One cannot stop fraudulent or illegal behaviour or hold company directors responsible for it. Neither can one set out auditors to be bloodhounds. They are watchdogs. They determine whether something is done inasmuch as they can form their judgment from what they receive. That is stated in the 2003 legislation, although I am unsure as to whether it is referred to in my amendment. Auditors form their judgments based on the information made available to them. There is an argument for an in-between position, namely, that the legislation can be written in such a way as to make the compliance statement refer to the issues of revenue taxation, financial accounting and governance only. I do not agree with this argument, but it is an in-between position. In other words, one would deal with the issues about which one has expressed a concern.
My amendment does not add to the burden on directors in any way. Rather, it reduces the burden and the number of companies. However, it requires that they reach a conclusion based on how they have done their work in the course of a year. Surely this is as much as anyone can be asked to do. It is a reasonable requirement in that situation.
I welcome the Tánaiste’s comment on holding further discussions. She stated she took what came from the Office of the Director of Corporate Enforcement, ODCE. While I accept her statement and do not challenge it in any way, will she ask the Director of Corporate Enforcement for his opinion on my proposal? Is he in favour of its inclusion in the legislation? Let us hear the answer. When I saw him recently, I was dying to ask him that question, but I did not want to compromise him in any way. The Tánaiste can ask him the question on behalf of us both. I cannot imagine he would not support my proposal, seeing as how it was his proposal to the Company Law Review Group, in which he has no interests. His only job therein is to ensure companies comply with the law of the land, governance is adhered to properly and standards of audit are acceptable on behalf of the public good.
Senator Jim Walsh: I have followed this interesting debate on the monitor. While the arguments are quite plausible, I must insert a note of caution, which I also did during our previous discussion on the Bill. People view directors as being knowledgeable of every aspect of their companies’ running, but that is not the case. In the main, executive and non-executive directors, a distinction that one must make, meet on a monthly basis. The directors, specifically the non-executive ones, will give direction in terms of policies, the finances examined at each meeting and what must be done to improve performance. They give overall direction over where the company should go. To suggest that certain obligations relating to important minutiae would lift the corporate veil and expose directors personally to issues that, by virtue of their time spent on the company’s operation, could not be grasped by them fully is to make a serious error in judgment in terms of where we are going in how businesses are run.
It has been argued by others and acknowledged by the Tánaiste that the law of the land applies to all companies. However, some executives within companies have designated responsibilities over a wide range of areas, including health and safety. Statutory obligations attach to them for the manner in which they administer their functions. However, I am seriously concerned about and critical of the thrust of policy that is being articulated by many in politics, namely, that we are heading towards becoming a nation of retirees and public servants. In that case, who will pay the Exchequer’s bill of €41 billion or €42 billion other than the private sector?
We must encourage people to participate in and give of their time and expertise to the functioning, management and direction of companies, but only in a way where they are protected by limited liability. This is essential. Recently, there has been a thrust, no doubt promoted by elements within social partnership, to lift that protection. While it may seem plausible, let us consider the result. I am critical of the secure professions, including the legal and medical professions, for profiteering from the other sectors. A contingent liability does not attach to their functions. However, most other businesses are operated as limited liability companies for a good reason.
We must ensure the laws of the land are used to penalise people, but only in a reasonable and practical way. Let us not undermine people’s interest in participating as non-executive directors. Many people argue we are only developing the role of the non-executive director, particularly in the private sector. Such directors add an extra dimension of expertise, which is important.
I caution against a catch-all measure so a director of a company does not have any protection from all sorts of eventualities over which he has no knowledge or control. We need to be cautious and careful, because that argument has not come forward strongly in the debate. The Minister has a responsibility to give very careful consideration to that side of the situation, so we have a thriving entrepreneurial business approach in this country which, despite the current climate of being dismissive and critical of that arena, has done a lot to get us to where we are economically.
While we are experiencing a downturn of some 8% or 9% in our GDP this year, it should not be forgotten our GDP increased since the mid-1990s at a rate of approximately 8% per year, which is one of the most significant and impressive rates in the world. I am trying to ensure we do not move in a direction which puts impediments in the way of that. I have seen many plausible arguments being made, not on this section of Companies Bill, which are being injected into policies and will be a disincentive for that particular area to grow in the future.
Those of us who work in the public service or are dependent on social welfare must realise that unless the private and productive sectors of this economy function properly, and are encouraged to do so, there may not be money to pay those in the public sector or on social welfare. We need to be very mindful of where we are going.
My amendments, such as the exemption, reduce the number of companies covered by the Minister’s proposal. I am raising the required level of turnover for the companies limited by shares from €15 million to €25 million per year, and making a number of other changes which I will not discuss. It reduces the number of companies involved, and I ask Senator Walsh to acknowledge that.
A point I read into the record already is that the Bill contains a proposal that a company may rely, at the director’s discretion, on internal and external advisers to help secure compliance. It is unnecessary and incurs additional costs. The director forms a view on the basis of acting honestly. I will not accept anybody telling me one has to get somebody in to say one has done one’s best to comply with the law of the land.
I will give a simple example. If a company has to make an appointment at any level, it is more than likely nobody from the board will be involved with most of the appointments made. An appointment has to be made in line with the laws of the land. No company will sit down and say, “Show me the advertisement”. They will not ask how many days did one have between the advertisement and the appointment, how the criteria were determined, how they were applied, who asked the questions and if the same questions were asked of all candidates. That is a job for the executive of the company. There is no question about that.
The same applies to legislation on health and safety, the environment, bullying or anything else. The company puts things in place and one must trust people to do so. All the director has to say is the company has a structure in place to ensure it complies with the law. If somebody did not put structures in place, one cannot hold the director accountable. There is no point in bringing in an outsider to check that, because he or she has to go through every single thing that happened during the course of the year. That is not what this is about. People have to act on the basis of trust and confidence.
I have no differences with the points made by Senator Walsh, in terms of his views on companies. I do not agree we should withdraw limited liability. One could certainly not have business without it. I made reference, on many occasions, to the fact people should be told it is a privilege to allow companies to operate. However, it is no more a privilege than a bank handing a loan to somebody. There is trust and confidence it will be paid back and the person is able to do so.
If people take on the responsibility and privilege of limited liability, they do so on the basis they will do their best. If a company goes to the wall, all we ever ask is if it happened in a way that was beyond the control of the company. We do not pull people before the courts, but if we felt somebody was not acting honourably, we would do so. That is all that is involved.
I listened to what the Minister said and asked her to put something to the Office of the Director of Corporate Enforcement. We are not dealing with Report Stage today. The Minister has listened and said she will look at the issue again. It is not my intention to push this to a vote at this point. We will revisit it on Report Stage and I would like to hear something extra from her then. We will see if something needs to be done at that point.
Senator Jim Walsh: I listened to the debate, which is what prompted me to come in and make a contribution. The law is there and companies have an obligation to comply with it. I have signed compliance notices, which are part of the annual audit. I understand Senator O’Toole wants to have that extended to other areas. He is looking to extend it to areas of which the directors may not have knowledge or control.
Senator Jim Walsh: The system should be in place and it is up to the law to uphold that. One should not put an additional obligation within the compliance notice. If anybody has read it, it is already very onerous, has been extended in recent years and there is a thrust to continue adding pieces to it. That should not be the case.
Senator Jim Walsh: Directors have responsibilities. Where they act negligently, with gross negligence or wilfully incorrectly, they are exposed, and that is as it should be. There have been cases taken against directors in that regard. However, we should be very careful to limit that to situations where people are acting fraudulently or with gross negligence.
I would also apply that to the public sector, which has not always been done. I mentioned the HIV blood scandal in this House many times, which warranted people ending up in jail as a consequence of their actions. I am fully in favour of that type of accountability for those who hold responsible offices. I agree with Senator O’Toole that to be a director of a company and have the protection of limited liability places responsibility on one to act in accordance with the law. We should be careful. There is also an economic and business side to this and people need to be encouraged.
We have seen examples of bad corporate governance and greed within many large companies, and that needs to be tackled. I do not like the thrust of placing more and more onerous responsibilities on directors, because a conscientious director will not sign off on a compliance notice without being 100% satisfied.
I concur with the point made by the Minister. In many instances, that may mean going outside the executives and getting independent validation and verification of what one is signing off on. One could perhaps qualify it by submitting a compliance notice, which Senator O’Toole inferred, and that it is a matter for executives. I agree with that. I was an executive of a company and I know the responsibilities involved and how one is held to account by directors.
However, if one qualifies it by saying one is relying on certain information, based on what the executives said, one is diluting it to the point of being meaningless. I am not sure there is any need to go beyond where we are.
Deputy Mary Coughlan: I do not want to get into an argument between two sides of the House. The crux of my argument comes from the need to have an auditor. Senator O’Toole said an auditor was not a bloodhound.
Deputy Mary Coughlan: It sounds original when it comes from the Senator’s utterances. I appreciate that. Company law should not be used as a vehicle to ensure other legislation is adhered to. Company law is company law. Senator O’Toole has made a considered argument and raised one or two matters for consideration such as tax law and other aspects of company law obligations. I will consider those points. I will be speaking to the Director of Corporate Enforcement and others in the context of the heads of the Bill. Depending on their reaction to the draft I would put money on it we will be inundated with people seeking to give their views on it. Consultation will take place before I form a final opinion on what we will bring to the House. That is the best approach to take. I appreciate that Senator O’Toole does not wish to press the amendment. It was my intention to address the matter in the context of the new draft legislation. I accept Senator O’Toole wishes that to happen now but my view is that should not be the case.
Deputy Mary Coughlan: However, I will have two weeks to think about it in between canvassing. I will be thinking about Senator O’Toole when I am out knocking on doors trying to get a few people elected. We will have further discussion on the matter.
Deputy Mary Coughlan: It will be the last thing on people’s minds. They will be wondering what we are talking about up here. There are no votes in it anyway, one way or the other, but it is still necessary legislation. I will reflect on the matter and read what Senator O’Toole said in the Official Report.
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