Hewitt under fire over proposals to limit director liabilities

The Confederation of British Industry yesterday attacked a Government attempt to limit directors' liability to corporate lawsuits as not doing enough to encourage talented people to join company boards.

The Confederation of British Industry yesterday attacked a Government attempt to limit directors' liability to corporate lawsuits as not doing enough to encourage talented people to join company boards.

Patricia Hewitt, the Secretary of State for Trade and Industry, gave the House of Commons proposals to limit the liability of directors and auditors in the face of a wave of crippling lawsuits following the collapse of companies such as Enron, WorldCom and Parmalat.

Digby Jones, the director-general of the CBI, said: "These provisions will help give some protection against ruinous litigation. But we do not want to leave directors so legally exposed that we fail to encourage talent into the boardroom and widen the gene pool. Put simply, people aren't going to want directorships if they have to put their house on the line for a relatively small return. If the risks outweigh the benefits, we will never see real diversity in the boardroom. Nothing proposed here goes far enough."

Ms Hewitt wants to let companies indemnify directors for legal costs, although they would still be liable to pay any damages awarded to the company and to repay defence costs to the company if unsuccessful.

The proposals, which will be implemented in amendments to the Companies (Audit, Investigations and Community Enterprise) Bill, are based on the recommendations of the Company Law Review. But the CBI says that they should have capped directors' liability and indemnified them against civil damages, as opposed to costs and third-party actions.

But the Institute of Chartered Accountants in England and Wales, and leading accountancy firms, welcomed Ms Hewitt's proposals for them. She refused to cap auditors' liability, but opened the door to limiting liability on a proportionate basis by contract. This means that, when an auditor takes on a client, they can agree that the auditor will be liable to pay damages only in proportion to its contribution to a default.

Ms Hewitt called upon auditors, businesses, and investors "to work together to examine whether proposals for a system of proportionate liability via contract are practical and/or desirable." However, it is understood that there is already broad agreement on the principle of proportionate liability, which already operates in non-audit areas. The DTI indicated that the principle may still be enshrined in the Companies Bill going through Parliament.

Eric Anstee, the chief executive of the Institute of Chartered Accountants, said: "I welcome government commitment to look further at the operation of the UK audit market and in particular the call for industry, investors and the profession to work together to examine proposals for a system of proportionate liability via contract.The institute will be establishing a task force to discuss the proposition and identify ways forward. The task force will produce a report to industry and government underpinning the case for proportionality by contract and setting out how this might be achieved."

Peter Wyman, a partner of PricewaterhouseCoopers, said: "If in the long run proportionality is permitted, we will have ended up with a better result than would have been the case. I am very pleased that there is a recognition that this is going to be urgently looked at by government. It will encourage more medium-sized auditors to pitch for audits among companies in the FTSE 350 index."

Mike Rake, the UK senior partner and chairman of KPMG International, said: "I very much applaud the efforts of Patricia Hewitt to find a fair and reasonable solution to the issue of auditor liability."

But both Deloitte & Touche and Ernst & Young felt the Government had not gone far enough. Nick Land, the chairman of Ernst & Young, said: "We are disappointed that the Government has failed to take the opportunity to address the unlimited liability of auditors. There is an urgent case for capping auditors' liability, as only a cap can ultimately protect a firm from a catastrophic claim."