DISCUSSION Common Sense: The Dark Matter of the Law

by Yolanda Villafuerte _______23rd November 2010
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by Nick Gould

 

As part of my research for a seminar in which I was involved during the summer, I asked the owners of about 40 small and medium sized companies, as well as a couple of private multinational trading groups and smaller quoted companies, how much they knew about corporate governance and more particularly directors’ duties, as set out in the Companies Act 2006.

I received twenty five replies which I thought was a good response.  The overwhelming impression (other than for the plcs) was that neither subject figured very highly on anyone’s list of priorities; most people had more important matters to worry about, such as their company’s survival and trying to make a profit in tough economic times.

Having previously raised these topics, there was not much new in most of the answers.  However, one theme came up a number of times: –

•    “I don’t look at the laws, I rely on common sense“;
•    “At the end of the day, common sense prevails”;
•    “Nobody had really taken any interest, they mostly felt that sound common sense, openness and integrity would cover 99% of the legal 1000’s of pages [of legislation and regulations]…” [a comment which perhaps sums up the whole purpose of this discussion].

I started thinking about the absence of common sense in much of the legislation relating to business law.  I understand, as a practising lawyer that not all legislation is, or can be, simple.  A lot of the law is extremely complex and realistically there is no ability for it to be made less so.  However, this is by no means always the case.  In addition, does complexity necessarily need to conflict with common sense?

The product of much legislation appears to be complexity rather than clarity.  The problem goes beyond the sheer amount of legislation. My question (to which I have yet to receive a satisfactory answer) is why so much legislation has become as it now is:  over-complex, unenforceable, unenforced and not fit for purpose.  Here are a couple of examples, both of which affect directly the work I do:

I find section 443 of the Companies Act 2006, which attempts to deal with the calculation of the period for filing company accounts, incomprehensible. Even the accompanying notes explaining the section are tough to get to grips with. I am happy to admit to this as I have been assured that I am not alone in my confusion!  Where is the sense in producing incomprehensible and therefore probably unworkable legislation?  Common sense suggests legislation ought to be intelligible – if not to everyone, then at the very least to those whose role it is to review, understand and advise on its meaning.

On the same topic, (but at a macro rather than a micro level), we now have:

•    over 11,000 pages of tax law considered by many to be the most complex in the world;
•    one fairly new Companies Act also considered by many to be not fit for purpose  with its  1,300 sections and more than 70 statutory instruments; and finally
•    a very, very large FSA so called “handbook”.

SMEs, which form by far the greatest part of the UK business community, certainly won’t find much help in these rule books, nor indeed, I would suggest, will many of their advisors.  I believe common sense requires that at some level the law and accompanying regulations are accessible to those who need to use and rely on them.  This is particularly relevant to SMEs who may have neither the time nor the ability to understand what is or isn’t “legal”.  Indeed this is a constant refrain from many of the organizations which represent these very large groups of SMEs.

I have suggested to the Ministers at the Department of Business, Skills and Innovation that rather than continuing to waste acres of forests for the paper used to churn out primary legislation and secondary rules, someone might first like to consider whether what we already have is fit for purpose (if anyone remembers what the original purpose was).  I was therefore, pleased to note (although nothing whatsoever to do with me) that the government set up reviews in respect of both taxation and health and safety legislation.  Initial comments from Lord Young’s report on the latter seem both practical and positive.  Hopefully someone will look at the morass of company rules and get rid of some of them as soon as possible.  Can it really take 32 sections of the Companies Act 2006 to set out the core rules on company names?

More rules don’t necessarily mean better rules.  On the whole the short Takeover Code, with its core principles, works more efficiently than most other rulebooks.  Is this because those who wrote these particular rules understand both the subject matter and the target audience?

If we want companies and their owners to focus on key issues, survival and profitability (as noted earlier) must be high on that list.  I would like legislators to make it easier for them to do so whenever possible.  This may seem, as has been put to me, “a bit laissez-faire(ish)”.  However, it might (in many cases) be preferable to the alternatives.  I know the government has suggested that one law be repealed for each new one enacted. I wonder if they couldn’t be persuaded to stop passing new rules relating to businesses and their management until 2011. Sometimes, doing nothing, having first considered other alternatives, can be the best possible solution in the circumstances.

To my mind the more difficult point is to what extent the ideas of common sense tie in with the current and numerous discussions on ethics and morality. That debate is for another paper and I think, another day.  I certainly don’t believe we should ignore the former, however right, proper and indeed popular it is currently to debate the latter.   As a subject for genuine discussion I think the idea of common sense as an issue is being overlooked. This has been confirmed by my numerous conversations with those who own and manage companies as well as lawyers, accountants and academics all of whom have convinced me this is a topic ignored for too long. Why? Perhaps because the subject is apparently so simplistic?  It is in fact anything but. That is why I have part titled this note “the dark matter of the law”.  Dark matter is everywhere and presumably one day someone will identify exactly what it is and why it is there.

The idea of common sense should not necessarily be incompatible with laws, rules and regulations clearly drafted and fit for purpose.  I have suggested in other papers that law which is, for want of a better word, “over-complex” is often  law which is often neither enforceable nor enforced.

If anyone thinks these are new ideas, I can do no better than repeat a short extract from an interview in 1980 with Siegmund Warburg, founder of S. G Warburg & Co Ltd, in London and perhaps the leading banker of his generation.

“What qualities do you look for in someone you hire?

I think the most important thing is the courage and common sense of a fellow”.

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