Corporate Governance

Law, Regulation and Theory

Marc Moore, Martin Petrin

• Publisher: Hart Publishing
• Year: 2017
• ISBN:
  9781509958511
• Edition: 1
• Topic: Law
• Subtopic: Commercial Law
• Index: Law

This textbook on corporate governance is written for advanced undergraduate and graduate law students, as well as scholars working in the field. It offers clear insight into this fascinating area of financial law, from the analysis of the legal and regulatory framework of corporate governance in the UK to the core laws and regulatory principles that determine the allocation of decision-making power in UK public companies. This book also highlights how prevailing corporate governance norms operate within their broader market and societal context. In doing so, it seeks to encourage readers to develop their own critical opinions on the topic by reference to leading strands of theoretical and inter-disciplinary literature, along with relevant comparative and historical insights.

PART I

Introduction to Corporate Governance

CHAPTER 1

What Is Corporate Governance?

‘CORPORATE GOVERNANCE’ DEFINED

Despite its rapidly growing academic popularity and practical relevance in recent years, ‘corporate governance’ remains a somewhat uncertain and contested term of reference. Indeed, if we were to ask a group of scholars or students to each specify what they understand the term to mean, it is likely that a number of highly varied attempted definitions would be offered.

The most commonly cited definition of corporate governance in the UK is that provided in the influential 1992 Report of the Cadbury Committee on the Financial Aspects of Corporate Governance. The Cadbury Report is widely regarded as the nucleus of the modern regulatory framework for corporate governance both domestically and – to a large extent – globally. According to Cadbury, ‘[c]orporate governance is the system by which companies are directed and controlled’, for which boards of directors bear principal responsibility.¹ Expanding on this basic theme, the most recent (2016) edition of the UK Corporate Governance Code – in effect, the Cadbury Report’s contemporary incarnation – asserts that ‘[t]he purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company’.² Meanwhile, the internationally applicable G20/OECD Principles of Corporate Governance explain how, on a fundamental level, corporate governance ‘provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined’.³

Each of the above definitions is helpful in providing a degree of illumination over what corporate governance essentially entails as a matter of business practice. However, in terms of identifying the nature and focus of corporate governance as an area of academic enquiry, all of the above practical depictions are necessarily limited. As such, they tend to throw up as many questions as answers, at least for those beginning their study of the subject for the first time. Indeed, on one view corporate governance – at least as described above – comes across as a heavily procedural and bureaucratic field of study, involving the painstaking perusal of a burgeoning body of codes, committee structures and consultation documents. From another perspective, though, the notion of corporate governance – as described in the same general terms – can contrarily seem like a heavily theoretical and largely extra-legal subject, involving open-ended engagement with fundamental questions such as the nature and rightful beneficiaries of business corporations within a wider social context. Accordingly, corporate governance tends to be contrasted with company (or, to use US parlance, ‘corporate’) law: the former dealing with the conceptual ‘big issues’ from a reformist standpoint, and the latter with the doctrinal minutiae of business entities regulation viewed in (small ‘c’) conservative terms.

While both of the above understandings of corporate governance contain a certain element of truth, neither quite encapsulates the distinct essence of the subject matter. Rather, as a general social-scientific phenomenon, corporate governance is concerned – first and foremost – with the problem of power. In particular, corporate governance is essentially an enquiry into the causes and consequences of the allocation of decision-making power within large, socially significant business organizations. This is broadly consistent with how the concept of ‘governance’ is typically understood within its traditional political domain, as relating to the various means by which the authority and decisions of powerful public officeholders are checked, counterbalanced, or otherwise rendered legitimate within society.⁴

In defining corporate governance in this way, we seek to distinguish it from company law more generally, which deals with numerous issues additional to the core allocation of corporate decision-making power including company formation, capital structure, or procedural rules on conducting shareholders’ and board meetings. Accordingly, except to the limited extent that these and other extraneous concerns have indirect ramifications for corporate ‘governance’ in the sense described above, they lie outside the scope of the present work. However, some other aspects of company law undoubtedly do have a direct bearing on the allocation of corporate decision-making power, and therefore are of immediate concern to us here. Included within this latter category are shareholders’ rights of intervention in corporate decision-making,⁵ and also the key rules and principles relating to the monitoring responsibilities of directors,⁶ internal financial control,⁷ executive remuneration⁸ and takeovers.⁹ Meanwhile, certain important elements of securities law, such as the periodic financial reporting requirements applicable to publicly listed companies,¹⁰ likewise fall within the purview of this book on account of their centrality to prevailing corporate power dynamics.

UNDERSTANDING CORPORATE POWER

Power is a ubiquitous phenomenon: according to one influential corporate governance scholar it ‘is perhaps the oldest social phenomenon in human history’.¹¹ But power is also an opaque and highly contested notion, and it has been said that ‘[f]ew words are used so frequently with so little seeming need to reflect on their meaning’.¹² Even within the specific corporate domain, the origins, nature and significance of power remain largely ambiguous issues. Pinning down a relevant and workable definition of the term for present purposes is therefore highly difficult.

Large and socially significant corporations can be regarded as exercising power in two key general respects. The first of these is the ‘external’ or public dimension of corporate power, and the second is the ‘internal’ or private dimension.¹³ As we will see below, external or public manifestations of corporate power within society are conventionally regarded as controllable via orthodox regulatory state interventions, as opposed to meriting direct consideration within the realm of corporate governance itself. Consequently, corporate governance – at least within the Anglo-American environment – has tended to focus almost exclusively on mitigating the principal internal or private manifestations of corporate power, particularly as they pertain to the interests of shareholders. We will now briefly examine each of these two core aspects of corporate power in turn, and will also explain our preference for concentrating on the latter (internal) dimension for the purposes of this book.

The External/Public Dimension of Corporate Power

In essence, the external or public dimension of corporate decision-making power denotes the practical capacity that large corporations have to make substantially unconstrained choices that have significant effects on the lives of others.¹⁴ Hence ‘power’, as viewed in this sense, can be defined – in Carl Kaysen’s words – as ‘the scope of significant choice’ open to a person or organization, with ‘power over others’ representing ‘the scope of his choices which affect them significantly’.¹⁵

As Parkinson notes, at the heart of this understanding of the term lies the concept of discretion as a source of unilateral decisional prerogative, whereby ‘companies are able to make choices which have important social consequences: they make private decisions which have public results’.¹⁶ The normative implication of this conception of corporate power is that, in some very important respects, large business organizations can be said to exert a degree of power and influence over our quality and patterns of living not dissimilar from that exhibited by government itself. However, in contrast to orthodox governmental agents, the individual officers who occupy senior positions within large corporations are not elected in accordance with ordinary public-democratic methods. Prima facie, this gives rise to a curious democratic deficit problem that would appear to challenge the legitimacy of such power from a general social standpoint.¹⁷

Large business organizations typically possess a significant sphere of discretion over a wide array of socio-economic issues. On a micro (i.e. individual firm¹⁸) level, these include choices over the selection and pricing of goods and services, and also the allocation and termination of employment opportunities, both geographically and in terms of relevant skills categories. On a sectorial or macro (i.e. economy-wide) level, meanwhile, external corporate decision-making power extends collectively over broader-reaching concerns such as the intensity and focus of research and development activity, the extent and rate of automation of production methods, and the degree to which technological advances will be accommodated by the re-skilling (as opposed to de-skilling) of workers. It also has significant ramifications for the ways in which we commonly communicate with each other as human beings: indeed, we need only imagine how different our global society would be without Facebook, Twitter and Instagram to appreciate the sheer pervasiveness of these companies’ influence over our lives.

Nominally ‘private’ corporate decisions on such matters, moreover, frequently impact considerably beyond the firm’s immediate productive relations, and can have a determinative influence over the welfare of local communities including supply chains, tertiary service providers and public infrastructure networks. Meanwhile, higher level decisions with respect to the future development of relevant product and process technologies can have a significant bearing on the general level and direction of skills development and educational policy, both nationally and even, in some instances, globally. This is not to mention the longer-term effects of those corporate activities and decisions affecting the welfare of future generations, such as the extent (if any) that companies invest in the development of ‘cleaner’ or more environmentally sustainable methods of production, energy provision and transportation.

Of course, in an important sense all corporations, regardless of the scale and scope of their operations, can ultimately be regarded as the product of our own perpetual (re)making, albeit in a diffuse and disorderly way. This is because in contrast to sovereign state organs, capitalistic business organizations are subject to the competitive constraints of their surrounding market environment, which ordinarily inhibits the ambit of decisional discretion enjoyed by their managerial officers. Moreover, in cases where competitive market pressures fail to hold external corporate power sufficiently in check, it is generally accepted that the state has a crucial role to play in ‘correcting’ the underlying market failures via targeted regulatory interventions.¹⁹ Such interventions include (inter alia) competition law measures aimed at curtailing particularly uncompetitive product market structures and practices,...