The Lowdown: This ex-teacher won't let the City misbehave

Jacqui Smith is exercising discipline to make British business scandal-free, as she tells Clayton Hirst

A lion? You really think that looks like a lion?" says Jacqui Smith. The minister with responsibility for corporate governance is pointing at an elaborate collage created by her five-year-old son, which is mounted in her Whitehall office. "Come on, try again." After a couple more guesses, she gives in: "Look, there's the trunk - it's an elephant."

After six years in politics, Smith's previous career as a secondary schoolteacher still shows through in her mannerisms. Promoted in the summer government reshuffle, the former economics and business studies teacher is about to take her powers of explanation to a new level.

On Wednesday, the Queen's Speech should include the much-anticipated Companies Bill, which will introduce tough new laws aimed at reducing the chances of an Enron-style corporate scandal happening in the UK. Penned by Smith and her predecessor, Melanie Johnson, the Bill will represent one of the biggest-ever reforms of company rules, and is set to shake many corporate trees.

"The Government cannot be responsible for business failure. What we can be responsible for is making sure the infrastructure is put in place to minimise the risk and build investors' confidence that Britain is a place in which to do business," says Smith.

There had been a lot of confusion about how and when the Government would introduce its post-Enron reforms. But Smith reveals that that they will come in two parts.

The first, due on Wednesday, will give investigators and auditors new powers to scrutinise companies suspected of dodgy corporate practice. Central to this will be the Financial Reporting Review Panel, until recently a little-known body that has been beefed up and will, for the first time, work with the Inland Revenue on cases of suspect accounting. The Bill will also give auditors fresh powers to demand information from companies. And, importantly, the Department of Trade and Industry's own investigators will have a wide-ranging remit to investigate businesses suspected of wrongdoing.

The reforms won't please everyone. The accounting pro- fession is still spooked by the demise of Enron's auditor, Andersen. UK auditors have lobbied hard to have a cap on their liabilities, but Smith says this won't be included in the Bill.

"Given that there are different views as to whether auditors should be able to limit their liability, and because there are links to directors' liabilities, then this is something we should consider as part of the longer-term company law reform," adds Smith.

On Monday, the 41-year-old minister attended her first CBI conference, and her approach- able style pleased many delegates. But some of this goodwill could evaporate when details of the next tranche of reforms begin to emerge for inclusion in a second Bill, perhaps next year. This will address some long-established City and corporate practices.

One issue is shareholder voting and the patchy institutional turnout at most annual general meetings. Smith says: "If we are not getting engagement in voting, that is bad for business. If a company is badly managed then [institutions] need go beyond either sticking with it in an uncritical manner or moving [their money] to another company. They must actively engage in changing the management."

She hints that one idea is the introduction of new rules to force investors to disclose their voting records: "Anything that helps us get transparency of information into the system is a good thing."

But Smith is careful not to go too far. Legislation, for example, to force institutions to vote at AGMs is unlikely to be included in the second Bill. "My instinct is that we should open up a system that promotes good behaviour before we look to mandatory voting."

Early next year, the Govern- ment will publish its response to its consultation on executive rewards for failure. "Quite understandably, the people in my constituency take a dim view of directors leaving companies in a mess, but leaving with a large payoff," says Smith. "Why does this matter? Answer: because we have a lot of good businesses in the country and we need to build a good business regime that all of us have faith in."

The consultation document raised various radical ideas to curb "golden parachutes" for departing executives. These included legislation to limit the length of contracts and establishing a stronger link between pay and performance.

Again, Smith hints that the consultation may not lead to new laws. "The approach we have tried to take is to establish principles not rules. It is about opening up transparency and using that as a lever for change, rather than legislation. The process of the Government shining the light [on directors' pay] has led the CBI and others to develop codes of practice, which I doubt would have happened if the spotlight hadn't been turned on."

But the MP for Redditch isn't entirely happy that the spotlight is shining on one of the big employers close to her constituency. Rover hit the headlines after it emerged that £12.95m had been paid into a trust to benefit executives and their families, while the car-maker's pension fund has a £73m deficit.

"The only thing I am worried about is that people are trying to make trouble for a company that is important to my West Midlands constit- uency. I know the unions have been in talks with the Phoenix group [the Rover holding company]. I am happy these discussions are happening."

On the specific issue of the money paid into the trust, Smith says: "I don't think it is helpful for me to comment on that." But she adds: "What I am concerned about is that people who never thought that Phoenix should be a success want to make trouble now."

The Rover case demonstrates the fine line Smith must tread. She must be seen to promote best corporate governance, but go too far and she and the Government will be branded as anti-business.