1 Introduction and Background
Introduction
There is little doubt that corporate governance is a critical concept in the commercial world of today, just as it has been for many years, arguably as far back as the birth of the limited liability company. It was not until the last 20 years or so that the term âcorporate governanceâ has been used on a frequent basis, emanating originally from the US, but many of the issues which it embraces have been the subject of much consideration in company law and practice and specifically in the promotion, incorporation, management, financing and regulation of companies for many years. Now companies regularly have part of their corporate website devoted to talking about what they do by way of corporate governance. As explained later in this chapter, this book deals with an aspect of company law that relates to, and impacts on, corporate governance. This aspect is the enlightened shareholder value (ESV) principle that emerged in the last days of the previous century and has been introduced into legislation in recent years in the UK. This new principle is related to corporate governance as it provides for how companies are to be managed. Clearly the Company Law Review Steering Group (âCLRSGâ), the committee appointed in 1998 by the Department of Trade and Industry in the UK to undertake a comprehensive review of UK company law, included much of its discussions about ESV under a broad corporate governance heading. Indeed, the CLRSG envisaged ESV helping to improve corporate governance.
At the outset it should be noted that ESV is now a central element in UK company law, but it has also attracted significant interest and discussion abroad, including the likes of the United States, Australia, Canada, Hong Kong and South Africa.
This chapter is intended to be a general introduction to the book. The next section of the chapter sets the scene and discusses the role of companies in the commercial world. This is followed by a very brief discussion of the nature of the company. Next the chapter examines the meaning of corporate govern-ance. After that the chapter, in two discrete sections, discusses the main players in the context of ESV, namely the directors and stakeholders (including the shareholders). Finally, the chapter explains the objective and structure of the book.
Setting the Scene
The importance of corporate governance is made more significant because of the fact that companies are of great consequence in the world of today. They have a great effect on our daily lives and have an influence over just about all that we do. Companies that are profit-making, and this book is focused on such companies, play a fundamental role as the most important institutions for social wealth creation in capitalist economies. Undoubtedly, a large element of economic activity is undertaken by companies in most, if not nearly all, of the worldâs nations, and they have been and are the dominant economic institutions in the world. In the United States companies account for nearly 100 per cent of all national output. The fact is that for well over a century the company has been âone of the primary institutions of capitalismâ and has developed as a frequently used vehicle for the ownership and control of property, the accumulation of capital and the organisation of production. But the company has also become the primary vehicle for the conduct of businesses in countries that are not regarded as capitalist in orientation. Clearly companies in general are the most used structure invoked by businesses around the world for running their activities.
Companies obviously vary in size. At the bottom of âthe pileâ we have small private companies (known in the US as closely-held companies), which have few shareholders, and possibly only one, and at the top we have huge multinational public companies generating millions of dollars, pounds, euro, yen etc each year. In most countries small private companies are by far the most prevalent. They will often run a small business employing a few people, and operate in a town, region or nationally. Public companies are fewer in number but they tend to have a greater influence and effect. They are often part of complex corporate groupings operating in several sectors of industry and commerce, and consisting of many layers of subsidiary companies. They have a professional management and a sophisticated organisational structure. There are many public companies around the world that are huge and their very size means that they have a significant influence on not only individuals but on industries and nations. In 2000, the Institute for Policy Studies released a study that showed that of the worldâs 100 largest economic entities, 51 were corporations and 49 were countries, and 22 American corporations had market capitalisations at the end of the 1990s that were greater than the gross domestic product of 22 countries, and this included reasonably significant economies such as Spain and Poland. More recently the figures suggest that the number of companies in the worldâs 100 largest economic entities has in fact increased to 52.
All companies, whether they are large or small, multinational or local, play a fundamental, multi-dimensional and evolving role in promoting economic growth. It has been said that âthe corporation provides the legal framework for the development of resources and the generation of wealth in the private sectorâ. But companies do not merely have an influence on economic affairs; their influence, and this is particularly so with large public companies, has such a reach that they can affect aspects of social and political life as well. Companies own large amounts of land and other assets, they enter into contracts, borrow large sums of money, and employ people. Public companies can exert significant leverage when dealing with the communities in which they operate, and they can affect the development of regions, and even nations; their investment decisions can determine the rate of growth of particular sectors of business. There are some larger companies which provide critical public services such as telecommunications, water, electricity and gas. Thomas Donaldson has noted that âlarge corporations are capable of influencing mainstream societal events and this power is not only economic, but social and politicalâ. One can point to instances of companies operating at a level that is âbeyond that of national lawâ, and acting so as to influence government policy and law-making.
While the larger a company the greater its impact on the world, generally speaking, it does not mean that the way a small company operates is of no significance. The fact is that no matter what size a company is it must be governed and it must be subject to appropriate rules and principles as to how it operates. There are many reasons for this, not least is the fact that the kind of companies to which we are referring in this work are limited liability companies. Referring to them in such a manner is somewhat misleading as it suggests that the companies enjoy limited liability. But that is not the case. In such companies it is the shareholders who enjoy limited liability. The liability of shareholders is limited to paying what they owe, if anything, on the shares for which they have subscribed. Limited liability has rather a mixed press, as is evident from what Cooke J of the New Zealand High Court stated in Nicholson v Permakraft (NZ) Ltd:
It [limited liability] is a privilege healthy as tending to the expansion of opportunities and commerce, but it is open to abuse. Irresponsible structural engineering â involving the creating, dissolving and transforming of incorporated companies to the prejudice of creditors â is a mischief to which the courts should be alive.
The Company
What we know as a limited liability company, whether it be of the public or private variety, is a peculiar thing. It is not human, but it is a legal person, as a consequence of the process of incorporation (registration). As a result of being legal persons companies are able to do many things which can be done by humans, namely own property, enter into contracts, commence legal proceedings in their own name and, most importantly, and unlike humans, enjoy perpetual succession.
Companies are structures that people who want to carry on business collectively can use effectively and productively. Some have regarded the company as one of the best systems that man has ever designed. Companies have been found to be useful when a business is producing, on a regular and organised basis, goods or services because in undergoing these tasks it is normal to need a wide variety of inputs, including financial resources, risk-bearing services and decision-making. The company is regarded as being well-suited to achieving this as it avoids the costs associated with market transactions involving individuals; the company is able to deal with all of the transactions and this reduces transaction costs and is more economically efficient. Ronald Coase, the renowned economics theorist, took the view that the company is efficient...