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Company Law

Company Law

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Published by Paul Wilson
Company law in Britain has suffered from a regrettable period of neglect. 3 As progress is made towards a new Companies Act (expected after the next UK General Election), practical ideas for legislation are explained in the following chapters. It is clear that the key areas for legislative attention are directors' duties and reporting requirements. 4The Law Commission's report on directors' duties excluded from consideration 'the identification of the interests which company law should serve.' 5
Company law in Britain has suffered from a regrettable period of neglect. 3 As progress is made towards a new Companies Act (expected after the next UK General Election), practical ideas for legislation are explained in the following chapters. It is clear that the key areas for legislative attention are directors' duties and reporting requirements. 4The Law Commission's report on directors' duties excluded from consideration 'the identification of the interests which company law should serve.' 5

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Published by: Paul Wilson on Jun 07, 2011
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Company law in Britain has suffered from a regrettable period of neglect. 3 As progress is made towards a new Companies Act (expected after the next UK GeneralElection), practical ideas for legislation are explained in the following chapters. It isclear that the key areas for legislative attention are directors' duties and reportingrequirements. 4The Law Commission's report on directors' duties excluded fromconsideration 'the identification of the interests which company law should serve.' 5 Itis submitted that this is not a coherent approach to reform, particularly given that the'guiding principles' for company law reform set out by the Law Commission included'law as facilitator', 'inclusivity' (defined in a somewhat circular fashion as 'concernthat the law should permit directors to take into account the interests of persons other than shareholders, to the extent the law allows this'), 'usability' (defined as meaningthat 'the law should be accessible, comprehensible, clear and consistent with commonsense'), and 'efficiency and cost-effectiveness'. 6 It is difficult to see how thesematters can be judged without reference to the parties whom company law is designedto protect or assist. The intention was that the Law Commission's somewhat technicalwork on directors' duties should 'feed in' to the DTI's broader Company Law Review.In corporate management theory, the idea has been set out that the board of directorsshould not simply be a senior executive committee, but ought to take a broad-ranginglong-term view of the company's activities and objectives. Public company directorsin reality may well not attend exclusively to maximising shareholder returns. Thelong-term enhancement and prosperity of the corporation for the benefit of all itsstakeholders often is, and arguably should always be, the board's primary goal.Accountability to all those who directly contribute to the company's activities, and for the company's reputation and status, rests with the directors. Several key objectivesfor the corporate board, not all of which sit easily with the duties and structurescurrently required by company law, have been canvassed by management theorists.Some observations on key directorial tasks follow and interviews with publiccompany officers themselves provided further insights.Any corporate governance system needs to enable businesses to be driven forward. If the board does not make sufficient time to construct an effective overall strategy andkeep it under regular review, all the activity of management and employees will not produce optimal results. Directors do not always ensure that they concentrate enough
 
on strategic planning as opposed to operational review. Board agendas and effortshave to be structured to achieve a correct balance between audit and organisation.Individuals who lack the capacity to contribute to a strategic vision for a company arenot needed on its board, whatever their other skills. Technical experts and specialistexecutives can be asked to advise directors as and when required. Directors as suchhave an altogether broader remit.There have been arguments advanced for a change in UK companies legislation toreflect a stakeholder approach towards directors' responsibilities. This wouldsupersede the duty to take decisions 'in the interests of the company', which has beeninterpreted as meaning the interests of shareholders. The enactment of such a provision can be said to have two potential benefits:1(a) it would legitimate the actions of directors in considering factors other than themaximisation of shareholder returns;2(b) it would foster a change in boardroom culture to accommodate recognition of theimportance of a company's relationships with its employees, customers and suppliersand the community and environment in and through which it operates, as well asthose with providers of capital.One conclusion of the RSA's Tomorrow's Company Inquiry23 was that directors were being led by a misunderstanding of current law to believe that they were obliged totake a more short-termist and shareholder-centric view of planning than was actuallyrequired. It was pointed out that the current law did not prevent directors from havingregard to the interests of non-member stakeholders if they judged that to be in the bestinterests of 'the corporation' - not only present members, but also future investors.Without the stimulus of changes to the law, it is, however, difficult to foresee achange of culture such that balanced long-term planning would become the norm for UK public companies. The existing law limits any accountability to stakeholderswithin a framework of, and to the overall purpose of, profit maximisation for shareholders. A more fundamental change in legislation is appropriate if it is acceptedthat all stakeholders have value in their own right, as ends in themselves. Shareholder concerns will not invariably be aligned with the demands of customers, employeesand suppliers, let alone legitimate environmental
 
and community concerns, and the law should explicitly permit directors to addressthese issues as part of their task.Kay proposes the following wording:24A director of a PLC shall at all times act in the manner he considers in theexercise of his business judgement best fitted to advance the interests of thecompany. The interests of the company include:the payment of returns to shareholders and investors sufficient to remunerate past investment and encourage future investment in the company;the development of the skills and capabilities of employees and suppliers of the company;the achievement of stability and security in the company's employment andtrading relationships;
23
RSA Inquiry,
Tomorrow's
Company (London: RSA,
1995).
21
the provision of goods and services of good quality to the company'scustomers at fair prices; andthe enhancement of the company's reputation for high standards of businessconduct.Such provision would not demand major change in the way effective publiccompanies are already run but would legitimate their actions and help to bring othersto the same standard.Goyder supplies a general objects clause to be incorporated into the Memorandum of Association of a public company:25To make the company economically and financially strong in order to ensureits continued growth and future development as a means of providing goodservice, secure employment and a fair return to its investors and shareholders.

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