Shareholder Primacy and Corporate Governance

Legal Aspects, Practices and Future Directions

Shuangge Wen

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136019920
• Edition: 1
• Topic: Law
• Subtopic: Corporate Law
• Index: Law

Rising defaults in the financial market in 2007, the current widespread economic recession and debt crisis have added impetus to existing doubts about companies' governance, and cast new light on future trends in shareholder-oriented corporate practice. Taking account of these developments in the field and realising the current need for changes in governance, this book offers a thorough exploration of the origins, recent changes and future development of the corporate objective—shareholder primacy. Legal and theoretical aspects are examined so as to provide a comprehensive and critical account of the practices reflecting shareholder primacy in the UK. In the wake of the financial crisis, this book investigates the direction of future policy, with particular attention to changes in governing rules and regulations and their implications for preserving the objective of shareholder primacy. It examines current UK and EU reform proposals calling for long-term and socially-responsible corporate performance, and the potential friction between proposed legal changes and commercial practices.

This book will be useful to researchers and students of company law, and business and management studies.

Part I

The basis of shareholder primacy in the UK

1 Corporate governance: Concepts and mechanisms

Consisting of three chapters, Part I of this book provides theoretical and practical analyses, delineating the overriding status of the shareholder value paradigm in the UK. As a conceptual foundation for the whole book, Chapter One provides an overview of relevant concepts and mechanisms within corporate governance, which we will come across frequently in the subsequent chapters. It starts by reviewing the genesis and significance of corporate governance, followed by an exploration of major corporate governance issues and mechanisms surrounding the corporate objective debate, including various stakeholders' interests, the structures and strategic roles of boards, external market structures and regulatory regimes. The last section outlines existing shareholder-oriented corporate governance mechanisms in the UK, on the basis of which the prospect of the continued precedence of shareholder value will be analysed in the following chapters.

Genesis of corporate governance

“Corporate governance has only recently emerged as a discipline in its own right, although the strands of political economy it embraces stretch back through centuries.”¹ While its historical evolution can be traced back to the origins of modern industry,² the term “ corporate governance” only emerged in the mid-to-late 1970s in America after the Watergate scandal, with the intention of controlling big companies' corrupt overseas behaviours.³ Its formal usage in corporate law and legal practice did not come about until the 1980s, when a rash of hostile takeovers and consequent corporate collapses highlighted the significance of incorporating corporate governance into regulatory regimes.⁴ Since that time a large amount of relevant work has contributed to the development of corporate governance as an independent discipline.

A corporate governance model incorporates theories and practices regarding various aspects, including corporate values and objectives and internal corporate structures as well as external rules and regulations that relate to corporations. In general terms, the comparative literature divides the corporate governance world into two ideal-type models: the Anglo-American model (exemplified by the United States and the United Kingdom),⁵ and the Continental model (exemplified by Germany and Japan).⁶ Each type of framework, reflecting a variety of distinguishing historical, cultural and financial traditions,⁷ is characterised by different ownership patterns, managerial strategies and structural elements.⁸ A fundamental diversity distinguishing the two models nevertheless lies in their diverse understandings of the purposes of a corporation. Corporations residing in Anglo-American countries generally apply the shareholder value paradigm and recognise the maximisation of shareholders' wealth as their fundamental corporate objective,⁹ while in jurisdictions following the Continental approach, corporations tend to embrace broader concerns relevant to the interests of various stakeholders – employees, creditors, suppliers, customers, local communities and the environment – within the realm of managerial concern.¹⁰

Notwithstanding the growing attention being paid to corporate governance issues, practical diversities among the developed capitalist economies have so far defied a common definition of corporate governance. In its broadest sense, corporate governance is crucial to the realisation of macroeconomic and social goals, and is seen as embracing both the internal governing structures of a corporation and the external forces affecting corporate practice.¹¹ One prominent example is the definition provided by the World Bank, suggesting that corporate governance is “ the organisations and rules that affect expectations about the exercise of control of resources in firms”.¹² However, under most business circumstances, especially in direct association in the business context, this term is commonly delineated in a narrow mode, referring to the internal structure and operation of a corporation's decision-making practices.¹³

The understanding of corporate governance becomes more divergent on closer inspection, with interpretations shaped up by diverse recognitions of the purpose of the corporation. At one polar extreme, the shareholder value orientation principle honoured by Anglo-American jurisdictions requires a company to maximise the interests of its shareholders ahead of any other interested party who might have claims against the company.¹⁴ Corporate governance systems in these countries, led by the United Kingdom, are arranged to focus on “ deal(ing) with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment”.¹⁵ In stark contrast, the principal objective of corporate governance in Continental systems epitomised by Germany is “ to ensure the continued existence of the enterprise and its sustainable creation of value in conformity with the principles of the social market economy (interest of the enterprise)”.¹⁶ Corporate governance as a subject on its own is therefore defined with an emphasis on coordinating the interests of various corporate constituencies, such as “ the structure of rights and responsibilities among the parties with a stake in the firm”,¹⁷ or “ the process by which corporations are made responsive to the rights and wishes of stakeholders”.¹⁸

In the United Kingdom, the evolution of definitions of corporate governance has faithfully followed the shareholder-oriented route. The most authoritative conceptualisation of corporate governance in the UK, initially presented in the Cadbury Report, explicitly emphasised the predominance of the principal-agent relationship (between shareholders and directors) in corporate operations and the shareholder primacy principle.¹⁹ The 1998 Hampel Report further clarified that the single overriding objective shared by all listed companies, whatever their size or type of business, is the preservation and the greatest practicable enhancement over time of their shareholders' investment.²⁰ In the Company Law Review process, the Company Law Review Steering Group (hereinafter referred to as CLRSG) went on to state that although the conceptions of “ shareholder value” and “ shareholder wealth” are flexible and developing, the law on the formation and management of companies serves the ultimate interests of shareholders by conferring on them ultimate control of the undertaking.²¹ Based on these understandings, the consideration of the interests of non-shareholder constituencies is incorporated in the UK company law regime merely as a means to achieve the maximisation of shareholder wealth.²²

Significance of the corporate objective debate

As Parsons argues, “ (the) defining characteristic (of corporations) is the attainment of a specific goal or purpose”.²³ Although the fact that companies are legal persons in their own right is acknowledged in almost every jurisdiction across the world, the different objectives that we desire these artificial creations to reach have in practice led to diverse strategic priorities, distinct structural arrangements of ownership and control, and even varying macro-regulatory environments within which corporations operate. As ce...