Corporate Governance and Company Law

INTRODUCTION Modern business enterprises taking tremendous effort to maximize their profits by implementing their own market strategies, corporate governance has lot to do under such circumstances. Corporate governance comprehensively refers to the main mechanism which involves in the process of regulation and existence of an enterprise.The separate legal entity concept where a company possesses and its distinct nature from the members who fund in their money towards the capital of the enterprise and empower its management to a team of specialized managers. In this context the people who pooling their money in to company are shareholders and the specialist managers who are assign to direct and manage are well-known as Directors of the company. It is significant that there is no universal definition with related to the corporate governance but it develops a system where the directors are entrusted with duties and responsibilities in relation to the management of the company, more fully it dealt with the ways of bringing the benefits of the investors (the principals) and the managers (the agents) it is based on a system of collective board responsibility and accountability as a whole. It is evident that the corporate governance focuses towards for the maximum welfare to the shareholders by regulating the duties of the directors of its company. The well known fact is that since corporation posses a separate legal entity from its managers and the owners, it has some obligations towards constituencies at large, where it declares certain moral obligations to the enterprise to consider other “stakeholders”. In the context of law the term stakeholder consist of suppliers, employees, customers and the society at large. It is often said that the corporate governance is also consider about social contract where a company deals with the interest of other stakeholders. The Organization for Economic Co-Operation and Development expressed the view of above as follows; “Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders.1” As stated earlier, the main function of the corporate governance is to monitor the functions of the directors of a company and regulate its duties by providing the mechanism so that to certify that they do not misuse their powers.

Various methods of mechanism can be seen in UK which can be used to regulate the duties of its directors, one of prominent out of all is the Companies Act of 2006. There is also recognition to secure creditors by virtue of statutory provisions, under the Companies Legislation of 2006 and also under the Insolvency Act of 1986. This research paper basically deals with the debate between the shareholder and the stakeholder models in UK, it also elaborate the new concept that has been introduced to protect stakeholder’s interest in order to gain overall success to the company. SHAREHOLDER PRIMACY MODEL Basically this model thinks shareholder as the owner of the enterprise, and mainly deals with the profit maximisation of the company. The view of shareholders as the owners of the company is reflected in the Cadbury Report on the Financial Aspects of Corporate Govenance2.The most idealistic way to put it would be that the shareholders are not the owners of the company but the owners of the shares of the company. This followed by the land mark case of Salomon v Salomon & Co,3 Which elaborates the separate legal entity concept of a company. Since the concept of shareholders model deals with capital of the company, the main objective of the shareholder theory considered as to be the profit maximization of the firm, as already identified that “the shareholders as the owners of the business”, the only social responsibility of business is to increase its profits”4. In UK and Anglo American countries recognised that the directors have fiduciary duties to conduct the affairs in the interests of its members. This is only because that the shareholders are residual owners, in that sense they have power to control the rights of the other stakeholders.

According to Andrew Keay shareholders are the ultimate risk bearers, so in a situation of insolvency and it ends up in liquidation the claims of the shareholders will be settled first, subject the claims of the creditors. Since they consider being the residual claimants, shareholder will not get the priority above any other stakeholders5.Meantime shareholders acted as ultimate risk-bearer and face uncertain difficulties by pooling their assets to the company, they are secured by the fiduciary duties of the directors.

Shareholder model is again supported by individualism and laissez –faire concepts, which respectively focuses on individual property rights and less state interference .In this context individual ownership rights and maximising profits are tend to be the sole objective of the free trade market and a competitive, economic, productive system. Thus the prime goal of a company is to consider about the profits while social wellbeing and functions to be left to the government and social bodies. The shareholder concept values the profits of the shareholders as the prime objective of a company. If the company draw back their attention towards other interests, the directorial activities of the company become less important and reduce the investments. Under these circumstances directors compel to produce ample wealth in order to please the shareholders by any means. Compared to US corporate system, UK corporate system has given more powers to shareholders and they even able to remove executive directors and to welcome hostile takeover bids. The crisis of 2008 revealed the lacuna of the existing corporate system in preventing risk taking exercises and inordinate remuneration, mostly among banks and other financial bodies.

The Maxwell scandal brought major reform to UK corporate system. And it emphasised many results which were flagged up as scandalous corporate behaviour. The other primary Corporate collapses such as, Asil Nadir’s Polly peck, BCCI and Coloroll also demean the U.K. Corporate Governance system. THE STAKEHOLDER VALUE MODEL The alternative stakeholder model of the company has variable advantages, through creating culture of long term investment plans, it helps to develop the profitability and the productivity of the company other more deals with the environment and the social aspects of the society. The definition of stakeholder is very vast and it basically includes all the parties who are having the interest towrds the particular company, such as employees, suppliers, consumers, creditors and the environment. Mainly these shareholders can be divided in to two basic groups, without the primary shareholders, the company will not carry on its functions, and consist of suppliers, creditors, employees, and lastly the customers. The second group of shareholders means, local media, central and local government and regulators, environment and the community at large. As described by Freeman, without those groups and their support the organisation would cease to exist6.The concept of stakeholderism is that all parties work together for a common objective and to gain shared profits, ‘opting in to the business‘s project7.The stakeholders who fund their substantial resources to the firm, so rather than making the maximum profit, to the shareholders, the company must value its stakeholders. The Stakeholder value model does not enable to sacrifice sole profit to the stakeholders, thus it suggests the duty of the directors to invoke the interests of the long term owners of the company and achieve benefits indirectly.

Sole minded objectives on shareholders mostly unproductive and tend to corporate greed8.the sole objective of the shareholder model lower by various financial crises such as Enron and World com. In 1932,Dodd, emphasised that the directors of a company are suppose to use their powers in a way which enables the social responsibilities of a company to its members such as employees, consumers and public at large9.the problem in this scenario is that how to evaluate the directors powers, since there is no regulatory standards to control their powers, and it might lead to misuse the powers at large.   ENLIGHTENED SHAREHOLDER VALUE This model basically continues the aspect of profit maximisation, and also to maintain a wealthy relationship with employees, creditors, customers, suppliers and the community. The enlightened shareholder model emerges as a result of the financial crises on 2008-2009 and also to focus on long term prospective financial decisions10.the UK Companies Act of 2006 is introduced this model. This approach mainly focuses to cater the interest of the typical stakeholders so as to obtain a long term shareholder wealth. Thus it is essential to draw the attention towrds the section 172 of the UK Companies Act of 2006. (1)A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to- (a)the likely consequences of any decision in the long term, (b)the interests of the company’s employees, (c)the need to foster the company’s business relationships with suppliers, customers and others, (d)the impact of the company’s operations on the community and the environment, (e)the desirability of the company maintaining a reputation for high standards of business conduct, and (f)the need to act fairly as between members of the company. (2)Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes. (3)The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company11. The section 172,tries to invoke the rights of the other stakeholders but maintaining the paramount objective of the interest of the shareholder.

Lawmakers wanted the directors to drive towards the success of the company for the benefits of its members as a whole ,by considering the values of such other various stakeholders. Even though there is such duty embodied to the directors, there is no regulatory standards is proven and identified to ascertain the duties. Thus it basically left to the directors and again it solely lies within the parameters of the directors’ discretion and their skills. GOOD FAITH The basic requisite is that to act in good faith which means to exercise reasonable care and due diligence ,skill. In the case of Charter bridge Corp Ltd v. Lloyds Bank Ltd,the court needed to ask whether a director of a company being an intelligent and honest man having involving, could in the whole instances, have believed reasonably that the transaction was for the benefit of the enterprise12. In the case of Brady v. Brady, Nourse LJ states that “it is hard to distinguish a company(artificial person ) and the persons interested in it, who are those persons?, where a company is going and solvent ,first and foremost, come the shareholders, present and the future”13.Comman Law position deals in ,Pervical v. Wright14,court held that directors owes a fiduciary duty against its shareholders only in limited situations where a company subject to take over offers. RIGHTS WITHOUT REMEDY If any member who is recognised in the clause (a) to (f).of section 172(1), is maltreated and its solely because of the breach of the provision of the directors, in such instance whether such aggrieved party can sue director? The answer is “no”, from all prominent authors. And only remedy against such situation is to entertain injunctive relief. INSOLVANCY ACT Contrary to the above the UK Insolvency Act 1986, enables the alternative via ESV duties, the section 212 of the Act, let any creditor or liquidator of an insolvent company to make an application to courts to review the conduct of a director or any other person involved as a manager of the company. And if he finds guilty court may order to contribute the funds to the company by way of compensation15. DISQUALIFIACTION RULES Shedule 1 of the Disqualification act reflected to the ESV model.

Where it protect the welfare of the customers and creditors of the company. CONCLUSION The ultimate objective of the provision 172 conveys that, success of the company can be better achieved by fulfilling the interest of the other stakeholders of the company. Even though the access is given to the legitimate interest of the wider stakeholders, the basic objective still remains as the interest of the shareholder.

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