The Companies Act, a sweeping piece of legislation intended to simplify and improve company law, received royal assent on November 8, 2006. Most of its provisions are expected to come into force by October 2008, but some parts (such as the new regime for communications) will be effective this month.
The act, which is the single largest piece of legislation ever drafted, is expected to help small businesses save up to £100m a year. But could it also bog down directors in even more paperwork? Possibly, says Martin Webster, partner at law firm Pinsent Masons. Overall, he thinks Whitehall has done “a pretty good job” of trying to get rid of unnecessary regulation. The government’s stance, he says, is that if you’re a good, responsible company director there’s nothing to fear.
But, he adds, the act will inevitably create more admin because as well as acting in the interests of shareholders, directors will now have to show that they’re thinking about the longer term. That means employees, suppliers, consumers and the environment. Therefore, he says: “To prevent any risk, you’ve got to write it all down. To show in board minutes that you thought of this or that. If you think you may get sued, of course you’re going to want it written down, to prove that you were thinking about it. It’s idle of the government to try and deny that. So it could be seen as two steps forward and one step back.”
Michael Snyder, partner at accountancy firm Kingston Smith, agrees. “It’s onerous for directors to have to show that they’re thinking of the long- and short-term consequences of their decisions and that they are maintaining a reputation for a high standard of business conduct,” he says. “All of these things add to the burden of red tape. It seems to erode the benefit of being in business.”
Laura Frith, managing director of Reed Consulting, says parts of the act make good business sense. She supports the act’s measures that “encourage narrative reporting by companies to be forward-looking, covering risks as well as opportunities” because it puts HR on the business agenda and gets directors thinking about how they could improve their people metrics as well as their business performance.
In many respects it would be better to relate the good principles of this act, rather than viewing it as more red tape “In many respects it would be better to relate the good principles of this act, rather than viewing it as more red tape,” says Frith. “It’s going to bring greater transparency. It’s an opportunity rather than a threat. If you’ve got good people practices in operation in your business, your commercial results should improve. It’s a good thing from an investor’s point of view [to see] because they don’t know how their returns are being derived and whether it’s a sustainable return on investment or whether it’s a short-term ROI.”
Only bad businessess should fear the act, suggests Frith, because it will be easier to identify those that “might have used short-term tactics to improve their bottom line, or which have compromised their dealings with their people in some way”.
She adds: “Employment law was established to protect against the abuse of child labour. Nobody I know in the UK would disagree with that. Treating people fairly and with respect is the impetus for most legal regulations here.”
Those directors who try and do a good job and treat their people fairly and responsibly shouldn’t notice a huge difference. “The average director isn’t going to have to think about something that he wasn’t thinking about anyway, like the environment or his employees,” says Webster.
“The message I’m giving is, ‘you might as well start thinking about the Companies Act; there’s no harm in working on the basis that these principles have come in already. But in terms of, is there anything you need to do tomorrow, or even next week or next month? No, there’s not a lot’.” Not yet at least.
The act, which is the single largest piece of legislation ever drafted, is expected to help small businesses save up to £100m a year. But could it also bog down directors in even more paperwork? Possibly, says Martin Webster, partner at law firm Pinsent Masons. Overall, he thinks Whitehall has done “a pretty good job” of trying to get rid of unnecessary regulation. The government’s stance, he says, is that if you’re a good, responsible company director there’s nothing to fear.
But, he adds, the act will inevitably create more admin because as well as acting in the interests of shareholders, directors will now have to show that they’re thinking about the longer term. That means employees, suppliers, consumers and the environment. Therefore, he says: “To prevent any risk, you’ve got to write it all down. To show in board minutes that you thought of this or that. If you think you may get sued, of course you’re going to want it written down, to prove that you were thinking about it. It’s idle of the government to try and deny that. So it could be seen as two steps forward and one step back.”
Michael Snyder, partner at accountancy firm Kingston Smith, agrees. “It’s onerous for directors to have to show that they’re thinking of the long- and short-term consequences of their decisions and that they are maintaining a reputation for a high standard of business conduct,” he says. “All of these things add to the burden of red tape. It seems to erode the benefit of being in business.”
Laura Frith, managing director of Reed Consulting, says parts of the act make good business sense. She supports the act’s measures that “encourage narrative reporting by companies to be forward-looking, covering risks as well as opportunities” because it puts HR on the business agenda and gets directors thinking about how they could improve their people metrics as well as their business performance.
In many respects it would be better to relate the good principles of this act, rather than viewing it as more red tape “In many respects it would be better to relate the good principles of this act, rather than viewing it as more red tape,” says Frith. “It’s going to bring greater transparency. It’s an opportunity rather than a threat. If you’ve got good people practices in operation in your business, your commercial results should improve. It’s a good thing from an investor’s point of view [to see] because they don’t know how their returns are being derived and whether it’s a sustainable return on investment or whether it’s a short-term ROI.”
Only bad businessess should fear the act, suggests Frith, because it will be easier to identify those that “might have used short-term tactics to improve their bottom line, or which have compromised their dealings with their people in some way”.
She adds: “Employment law was established to protect against the abuse of child labour. Nobody I know in the UK would disagree with that. Treating people fairly and with respect is the impetus for most legal regulations here.”
Those directors who try and do a good job and treat their people fairly and responsibly shouldn’t notice a huge difference. “The average director isn’t going to have to think about something that he wasn’t thinking about anyway, like the environment or his employees,” says Webster.
“The message I’m giving is, ‘you might as well start thinking about the Companies Act; there’s no harm in working on the basis that these principles have come in already. But in terms of, is there anything you need to do tomorrow, or even next week or next month? No, there’s not a lot’.” Not yet at least.
