CIMA Welcomes Granting Of Royal Assent To New Companies Act

by Robin Pilgrim, LawAndTax-News.com, London

13 November 2006

The Chartered Institute of Management Accountants (CIMA) last week welcomed the new UK Companies Act, which received Royal Assent on Wednesday.

The bill introduces sweeping changes to simplify and improve company law, and all elements of the legislation will be in force by October 2008.

The Companies Act includes measures that:

• Give greater clarity on directors' duties, including making clear that they have to act in the interests of shareholders, but in doing so have to pay regard to the longer term, the interests of employees, suppliers, consumers and the environment;
• Encourages narrative reporting by companies to be forward-looking, covering risks as well as opportunities, with explicit requirements for quoted companies; and gives
• An option for all directors and shareholders to file a service address on the public record rather than a private address.

Shareholder engagement will also be promoted through enhancing the powers of proxies and making it easier for indirect investors to be informed and exercise governance rights in the company. The package also includes allowing shareholders to agree to limit the auditors' liability to the company to what is fair and reasonable.

The Act also includes a new offence for recklessly or knowingly including misleading, false or deceptive matters in an audit report, and a power is provided in the Act to require institutional investors to disclose how they use their votes.

CIMA stated last week that it was pleased to note that the Trade and Industry Secretary, Alistair Darling, has committed to providing a stable platform in relation to narrative disclosures.

Charles Tilley, Chief Executive at CIMA explained:

“After the turbulent changes during the past two years in respect of the legislative requirements for narrative reporting, CIMA is glad that the Trade and Industry Secretary does not envisage any further substantial changes to company law and would urge Government to hold fast to the concepts which underpinned the exemplary Operating Financial Review (OFR) requirements."

“Those concepts were the OFR’s strengths. It had a principles-based framework to enable flexibility in constructing the narrative, as opposed to a checklist of requirements. And it adhered to the enlightened shareholder concept, so that disclosures were focussed on information that enabled the investor to gain an understanding of the performance, position and prospects of the company in which they have invested."

"We observed during the passage of the Companies Bill that the proposals for additional disclosures suggested a checklist approach, as well as a move away from the investor as the primary user of the financial statements. Although it must be tempting for Ministers to listen to backbenchers or lobbyists who can always think of another essential category of disclosures, CIMA would urge that any future changes to the Business Review requirements should not further threaten its flexibility or focus.”

The Institute announced that:

"CIMA was disappointed with the Chancellor’s decision to repeal the short-lived OFR Regulation last year. However, the subsequent consultation allowed CIMA to raise its long-standing concern that directors could be held liable for forward-looking statements with the DTI. In preparation for the statutory OFR, CIMA sought and published a legal opinion from Allen & Overy LLP in order to assist directors to reduce risks of liability when making forward-looking disclosures in good faith."

"CIMA was therefore pleased when its findings helped influence Government to include a clause in the Bill, before it was laid before Parliament in May 2006. The clause in question meant that directors were no longer liable for providing false or misleading statements in the Director’s Report unless they did so recklessly. CIMA believes that directors need such protection if they are to make the frank and transparent disclosures required to push forward improvements in narrative reporting."

It concluded:

"Although the passage of the Act has been a huge and sometimes difficult process, CIMA is glad to see the new disclosure requirements incorporated into the final Companies Act as they will provide a statutory minimum level of disclosure for large companies. It is now for companies and their advisers to develop practice, which will lead to the next wave of improvements."

"It is significant to note that many companies have already pledged to exceed the Business Review requirements, as they have recognised the payback in terms of investor confidence and lower cost of capital that making enhanced narrative disclosures can bring."

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