Introduction

Throughout history, corporate form has functioned as the most appropriate

medium to organize and distribute huge capital.1 Since its birth, corporations
have offered some vital features such as limited liability, transferability of shares
and separate legal entity. These features have distinguished corporations from
other forms of business such as partnership or joint stock company. Perhaps this
is better said by M. M. Blair,
“... [A]nother critical feature of the corporate form that made it the preferred way of
organizing large, complex businesses was that a corporation is a separate legal entity
with potentially perpetual life, and is the legal owner of the assets used in the business.
Holding the property in corporate form rather than in a partnership or joint stock
company made it easier to commit resources to long-lived, specialized business
enterprises.”

Part one of this coursework, will justify the above statement by examining how
separate legal entity made incorporated companies the best form of business.

And because in every society, corporations play a significant role in creating

wealth,2 the best way to manage it has been a focal point of reform for many
years. However, the separation of ownership and control of corporations has
created obstacles in terms of operational efficiency of a company. Adam Smith in
his book The Wealth of Nations described the divergent interest between owners
and managers as the obstacle to an efficient operation of a company.3 He wrote,
directors
’’being the managers of the other people’s money rather than own, would
never watch over this money with the same anxious vigilance with which
partners in a private copartnery frequently watch over own’’4
This means that managers of a company may not jealously protect the interest
of the shareholder even though they are entrusted with the management and
control of the corporation. In addition, because the control of the corporation has
passed from the shareholders to the directors, the shareholder being a holder of

1
Robert Sprague, ‘’ Beyond Shareholder Value: Normative Standards For Sustainable Corporate Governance’’
(2010) 1 W. M. B.. L. Rev. 47 p49
2
Arden Dde, ‘’UK corporate governance after Enron’’ (2003) 3 J. C. L. S. 269 p 269
3
Harwell Well, ‘’The birth of corporate governance’’ (2009-2010) 33 S. U. L. R. 1247
p1251
4
ibid
right in the corporation’s wealth suddenly becomes a mere supplier of capital
with little power to participate in the management of the corporation.5

In the second part of this coursework, I shall examine the fiduciary duties of
directors in the management and control of corporation in the modern corporate
governance with a particular interest in the UK and US system of corporate
governance. And in addition, I shall comparatively look at where the modern
corporate governance has placed shareholders in these countries.

Corporate Legal Personality

The most distinguishable legal element of a corporation whether in the United

Kingdom or the United States, is its legal personality.6 This means that the
company is separate from its members. The well-known case on the cornerstone
of separate legal personality of a company is Salomon v Salomon,7 Mr Salomon
was carrying out a business as a sole trader. As the business flourished, he
decided to sell the business to a company he registered called A Salomon & Co
Ltd whose shareholders were Salomon himself and his wife and five children.
Salomon was issued debentures for the unpaid part of the purchase price and a
floating charge on the company’s asset as security for the debt. Upon liquidation
of the company, the creditors sued Salomon in his personal capacity for the
company’s unpaid debt but he argued that limitation of liability has protected
him.8 At the court of first instance and the court of appeal, it was held that the
company was acting as an agent of Salomon and therefore he should be liable
for all debts incurred by the company. On appeal, the House of Lord held that

’’ the company is at law a different person altogether from the subscribers to the
memorandum; and, though it may be that after incorporation the business is precisely
the same as it was before and the same persons are managers..’’

5
Robert Sprague, ‘’ Beyond Shareholder Value: Normative Standards For Sustainable Corporate Governance’’
(2010) 1 W. M. B.. L. Rev. 47 p49
6
In the UK, for instance, s15(1) CA 2006, provide that on registration of a company, the
registrar must give a certificate that the company is incorporated
7
(1897) AC 22
8
Ron Harris, ‘’the transplantation of the legal discourse on corporate personality
theories; from German codification to British political pluralism and American big
business’’ (2006) 63 W. L. L. R. 1421 p1465
This means that a company is a juridical person having the legal rights, duties,
obligations and liabilities resulting from legal relationships.9 And these legal
rights, duties, obligation and liabilities cannot be shared by any other person
except where the company is acting as an agent of the other person.10 In
Salomon v Salomon, the court further held that where the company’s objectives
of entering into a legal relationship is to benefit it shareholders, is not sufficient
to construe that the company is an agent of the shareholders. Therefore, as a
separate legal person from its members, a corporation can enter into a contract,
be a party to a proceeding and own properties.11

This concept of separate legal personality of a company had been strongly

embraced by the US12 when the court in Southern Railway v. Greene13 held that
corporations are persons under the law with the same rights as a natural person
with few exceptions.14 One of these exceptions is aggravated damages which is
awarded as a compensation for injury to feelings and a company has no feelings
to be injured.15

Separate legal entity is a principle of commercial convenience16 which allows

corporations to organize large and complex businesses as oppose to other form
of business such as partnership or Joint Stock Company. These benefits are
derived from the distinct effects of separate legal entity which may include

1. Limited liability

Arguably, the rationale behind separate legal entity is the limitation of personal
liabilities of members towards creditors.17 This is an essential feature of
corporate form which limits the liability of shareholders to their interest in the

9
In the UK, s16(3) CA 2006, provide that a registered company is capable of exercising
all the function of an incorporated company.
10
See J.H Rayner (mincing lane) ltd v. Department of trade and industry (1990) 2 AC 418
11
Derek F., et al. Company Law (26 edn, Oxford University Press Inc., New York 2009-
2910) p122
12
Philip I. Blumberg, ‘’The Corporate Personality Of American Law’’ (1990) 38 A. J. C. S 49
p53
13
216 U.S 400 (1910)
14
Philip I. Blumberg, ‘’The Corporate Personality Of American Law’’ (1990) 38 A. J. C. S 49
p58
15
Collins Stewart ltd v financial times lid (2005) EWHC 262
16
Daniel T. C. Song, ‘’the Salomon orthodoxy: unralling the metaphorical myth’’ (2001-
2002) 21 S. L. R. 199 p207
17
Marc Moore, ‘’a temple built on faulty foundation: piercing the corporate veil and the
legacy of Salomon v Salomon’’ (2006) J. B. L. p1
corporation.18 In other words, the shareholders are not responsible for the
corporation’s debt or torts. For instance, a judgment creditor can only enforce
the judgment against the asset of the corporation and not on the personal asset
of the members.19 The separation of the company’s liabilities from its members
allows the corporation to organize large and complex businesses as oppose to
general partnership which offers an unlimited liability on its members.20 Without
limited liability, the efficiency of businesses may be compromise as unlimited
liability imposes higher costs on economic production and an increase in capital
cost.21 The development of capital market depends on limited liability because
large and complex businesses require capital beyond the means of a single
entrepreneur, thereby requiring investment from the outsiders.22 Granting
Limited liability companies has encouraged capital investment because investors
can invest without risks to their personal net worth.23 Although some investors
may risk their entire worth to invest in a company which they operate but the
risk is very enormous as they stand to get, they stand to lose everything.
Limited liability allows investors to invest in different business without having to
incur the cost may be necessary to monitor the business.24

2. Perpetual succession

Another practical benefit of separate legal entity which made it a preferred

way of organizing complex businesses is its immortality. The company being
a juridical person, even if all the members died, the company still survives
until it is wound up or struck off the registrar.25 Partnership does not offer
this luxury as it is technically terminated on the retirement or death of a

18
R. C. Riddle, et al. ‘’Choice of Business Entity in Texas’’ (2004) 4 H. B. T. L. J. 298 p300
see also, s3 Company Act 2006
19
ibid
20
Robert W. Hamilton ‘’corporate entity’’ (1970-1971) 49 T. L. R. 981 p 982
21
Robert J. Rhee ‘’Bonding limited liability’’ (2009-2010) 51 W. M. L. R. 1417 p1420
22
John H. Matheson ‘’the limitation of limited liability: lessons for entrepreneurs (and
their attorneys)’’ (2003) 2 M. J. B. L. E. 2 p3
23
ibid
24
John H. Matheson ‘’the limitation of limited liability: lessons for entrepreneurs (and
their attorneys)’’ (2003) 2 M. J. B. L. E. 2 p3
25
Daniel T. C. Song, ‘’the Salomon orthodoxy: unralling the metaphorical myth’’ (2001-
2002) 21 S. L. R. 199 p202
 partner but a company is not easily dissolved.26 This perpetual succession has
made it easier for companies to commit resources to long time businesses.

3. Business of the company

Another reason that made separate legal entity a preferred way of organizing
large and complex businesses is the fact that the corporation’s business is
carried out by the corporation as a separate person.27 In partnership for
instance, there is no clear division between the partnership and the business
and this has expose the partners to high risk which may affect their personal
asset. The company being a separate person conducting its own business, the
rights and liabilities belong to the corporation as a separate entity and not its
members28; therefore, the members cannot sue on its behalf or be sued.29
The members have no locus standi to claim remedies for any wrong done
against the company’s business. For instance, where a defamatory remark is
made against the company’s business, only the company may sue for libel or
slander.30

4. Capacity to hold property

Another special feature of separate legal entity is the capacity of the

company to hold property as a separate person in its own name and the
members have no direct proprietary right over the property.31 In Ayton Ltd v.
Popely32 it was held that the fact that a member stand to benefits from the
company’s property does not make him a beneficial owner of the company’s
property. This feature allows the company to explore the company’s property
exclusively towards the purpose of the company which may include
organizing large and complex businesses.

5. Corporation may contract with its members

26
Albert M. Lehrman, ‘’should you incorporate?’’ (1976-1977) 4 T. S. U. L. R. 66 p68
27
Derek F., et al. Company Law (26 edn, Oxford University Press Inc., New York 2009-
2910) p124
28
Alberto Ferrer, ‘’comparative study of the doctrine of juridical personality’’ (1949-1950)
19 R. J. U. P. R. 79 p98
29
Foss v. Harbottle (1843) 2 Hare 461
30
Jameel v wall street journal Europe (2006) UK HL 44
31
Derek F., et al. Company Law (26 edn, Oxford University Press Inc., New York 2009-
2910) p125
32
(2005) E.W.H.C. 810
 A corporation being a separate person from its members may enter into a
contract with its members. In Lee v. Lee’s Air Farming Ltd,33 it was held that
a corporation can contract with its member under the contract of service.
Partnership does not enjoy this feature as there is no clear division between
the partners and the business.

However, it is pertinent to note that whether in the US or the UK, the separate
legal entity cannot be relied upon for any purpose other than the furtherance of
the company’s objectives. The court will not respect the sanctity of corporate
entity where the officers of the company use the corporate entity as a sham to
commit fraud.34 In United States v. Milwaukee Refrigeration Transit Company35
The court held that ’’

“A corporation will be looked upon as a legal entity as a general rule but when the
notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or
defend crime the law will regard the corporation as an association of persons.”

This means that all the consequence of separate legal personality will be ignored
and the members or officers will be personally liable.36

The Modern Corporate Governance

The Cadbury committee defined corporate governance as ’’the system by which
companies are directed and controlled’’.37 This means that corporate governance
set out an easier system to balance what managers do with what shareholders
desire.38 In other words, the directors and officers have the proper machineries
to carry out their duties and avoid conflicts of interest while working on behalf of
the shareholders and the shareholders are adequately informed about the
activities of the officers and directors.39
In spite of the fact that the concept of corporate governance is not a new
phenomenon, it has generated serious attention in the last decade in the wake
of major corporate breakdown in some part of the world especially the US and
33
(1961) AC 12
34
Robert W. Hamilton ‘’corporate entity’’ (1970-1971) 49 T. L. R. 981 p 982
35
142 F.247 (1906)
36
Peter Ziegler & Lynn Gallagher ’’Lifting the corporate veil in the pursuit of justice’’ (1990) 292 J.B.L.313 p3
37
Arden Dde, ‘’UK corporate governance after Enron’’ (2003) 3 J. C. L. S. 269 p 269
38
Harwell Well, ‘’The birth of corporate governance’’ (2009-2010) 33 S. U. L. R. 1247
p1251
39
ibid
the UK.40 As a result, there was renewed interest by government and
stakeholders in many countries to have a laws and codes to regulate corporate
behaviour.
In achieving this, the approach to corporate governance in the US differs from
the UK even though both countries have unitary board system of directors as
oppose to Germany’s two tiered boards.41 The UK approach is a creation of
flexible Combined Code by the London Stock exchange. The combined code is
principle based and managers are expected to comply and where they do not
comply, they should publicly explain why.42 Even though the UK principle based
corporate governance is optional, there is pressure to conform to it so as to
meet up with international best practices. This is important because the
international business community will not invest in a country where the risk of
investment is high, owing to bad corporate governance.43
However, the US rule-based approach was brought about by legislation
(Sarbanes –Oxley Act 2002) after the collapse of Enron, and the Sarbanes-
Oxley rules granted the SEC and private persons to enforce its provision through
litigation.44 Sarbanes-Oxley among other things adopted new accounting
standard for public companies by providing for the independence of auditors. It
also provides in s303 that it shall be unlawful for directors or officers to mislead
the company.45

Fiduciary duties of directors in the US and the UK

Directors are under fiduciary duties to act in the best interest of the corporation
whose affairs have been entrusted in them by the shareholders.46

40
Angus Young, ‘’Rethinking the fundamentals of corporate governance: the relevance of culture in the global
age’’ (2008) 29 C. L.168-174 p1
41
Allison D. Garrett ‘’a comparison of united kingdom and united states approaches to
board structure’’ (2007) 3 C. G. L. R. 93 p93
42
John V. Anderson, ‘’regulating corporations the American way: why exhaustive rules
and just deserts are mainstay of U.S. corporate governance’’ (2008) 57 D. L. J. 1081
p1090
43
Angus Young, ‘’Rethinking the fundamentals of corporate governance: the relevance of culture in the global
age’’ (2008) 29 C. L.168-174 p1
44
Elias Mossos ‘’Sarbanes-Oxley goes to Europe: a comparative analysis of united states
and European union corporate reforms after Enron’’ (2004) 13 C. I. T. L. J. 9 p9
45
Peter V. Letsou, ‘’ the Changing Face of Corporate Governance Regulation in the United States: The Evolving
Roles of the Federal and State Governments’’ (2009-2010) 46 W. L. R. 149 p185
46
Regina F. Burch, ‘’director oversight and monitoring: the standard of care and the
standard of liability post Enron’’ (2006) 6 W. L. R 482 p486
The term “fiduciary” comes from a Latin word ‘’fiducia’’ meaning trust or
confidence.47 Directors of a company occupied a position of trust and confidence
to promote the interest of the company and its shareholders. These fiduciary
duties of directors are duties which provide protection to non-fiduciary duties of
directors.48 In other words, it seeks to avoid the violation of non-fiduciary duties.
The non-fiduciary duties of directors can be owed simultaneously with the
fiduciary duties, this is because the two are distinct and the proof of the violation
of fiduciary duties does not depend on the proof of the violation of non-fiduciary
duty.49 The assertion that the aim of fiduciary duty is to protect the proper
execution of non-fiduciary duties is best demonstrated in the prohibition of
directors from acting where there is a conflict of interest between his duty and
his personal interest.50 For instance, Section 175(1) of the UK Companies Act
2006 provides that directors must
“avoid a situation in which he has, or can have, a direct or indirect interest that
conflicts or possibly may conflict with the interests of the company”.
In Aberdeen Railway Co. V. Blaikie Bros51 the court held that no one in a
fiduciary position would be allowed to engage in any transaction where his
personal interest may likely conflict with the interest of whom he is bound to
protect.52
Another fiduciary duty mentioned in the Act is ‘’good faith.’’ s172(1) provides
that ‘’director 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 the company and it members as a
whole’’
The directors are to also consider the interest of stakeholders and the
community at large but it can be argue that these considerations is only to the
extent of the duties imposed on the directors. Nevertheless, the provision of
s172 C.A. 2006 does not reflect the ambivalence nature that characterises the
formulation of the fiduciary duties of directors.53 I will like to argue here that;
s172 has extended the director’s fiduciary duties of good faith to the entire
community. That is, any decision that will affect the interest of the community

47
James Edelman, ‘’ When do fiduciary duties arise?’’ (2010) 126 L. Q. R. 302 p1
48
Matthew Conaglen, ‘’ The nature and function of fiduciary loyalty’’ (2005) 121 L.Q.R. 452-480 p2
49
ibid
50
Ibid p4
51
(1854)1 Macq 461 at 471
52
Matthew Conaglen, ‘’ The nature and function of fiduciary loyalty’’ (2005) 121 L.Q.R. 452-480 p2
53
Christopher M. Bruner, ‘’ Power and Purpose in the Anglo-American Corporation’’ (2010) 50 V. J. I. L. 3 p605
must be considered in good faith. But the question which is yet to be answered
is whether the community can sue the directors for breach of this duty.

In the US for instance, the duty of care and the duty of loyalty are seen as the
fiduciary duties of directors while the court and legislatures stated that directors
must also carry out their duties in good faith but it is still undetermined whether
the duty of good faith is within duty of care or duty of loyalty.54 Unlike the duty
of loyalty or care, the duty of good faith does not define action instead it defines
a state of mind. A director may easily be told to be ’’careful’’ or ’’loyal’’ but is
difficult to say be ’’good faith’’.55 Furlow C. W., wrote that good faith being a
state of mind consisting
’’(1) honest in belief or purpose,(2)faithfulness to one’s duty or obligation,
(3)observance of reasonable commercial standards of fair dealing in a given trade or
business, or (4) absence of intent to defraud or to seek unconscionable advantage’’56

Good faith statutorily comes to light after the decision in Smith v Van Gorkom,57
where the court held that the violation of the duty of care would generate
personal monetary liability against directors who may believe to be acting in
good faith and in the best interest of the company and the shareholders.58 As the
result of this decision, directors insurance become so expensive and a growing
concern whether companies can hire qualified directors.59 Consequently, the
Delaware legislature adopted s102(b)(7) which shielded the directors from
personal liability for the violation of their duty of care but provided few
exceptions which include a breach of duty of loyalty and a breach of an act or
omission not in good faith.60 However, in Stone v Ritter,61 the court held that
fiduciary duty of good faith is a part of fiduciary duty of loyalty.62

54
Regina F. Burch, ‘’director oversight and monitoring: the standard of care and the
standard of liability post Enron’’ (2006) 6 W. L. R 482 p486
55
Clark W. Furlow, ‘’Good faith, fiduciary duties and the business judgment rule in
Delaware’’ (2009) 2009 U. L. R. 1061 p1063
56
Clark W. Furlow, ‘’Good faith, fiduciary duties and the business judgment rule in
Delaware’’ (2009) 2009 U. L. R. 1061 p1069
57
488 A2.d 858
58
Clark W. Furlow, ‘’Good faith, fiduciary duties and the business judgment rule in
Delaware’’ (2009) 2009 U. L. R. 1061 p1063
59
ibid
60
Ibid p1065
61
911 A.2d 362,370 (Del.2006)
62
Andrew S. Gold, ‘’ the new concept of loyalty in corporate law’’ (2009-2010) 43 U. C. D.
R. 457 p459
Therefore, directors’ duty of good faith demands that decision making must be
intended to benefit the company and its shareholders.
Good faith and careless decision making

In Caremark63 it was held that failure to act where there is need to do so is a

proof of bad faith. Therefore, the failure of directors to excise care in decision
making will expose them to liability. In Disney III, the plaintiff a shareholder of
Walt Disney Corporation instituted a derivative action against the board of
directors for the approval of Michael Ovitz as Disney president and his
termination which entitled him to $140 as severance package. The defendants
argued that complaint only showed that the directors have failed to exercise
their duty of care in decision making, which they were protected from personal
liability under s102(b)(7). But the court disregarded this argument and held
that ’’that the Disney directors failed to exercise any business judgment and
failed to make any good faith attempt to fulfil their fiduciary duties to Disney
and its shareholders’’64 Therefore, intentional disregard of fiduciary duty of care
in decision making may be construed as an act or omission in bad faith. This is a
landmark decision in terms of holding directors responsible for their decision. I
align myself with the judgment of the court. The director’s action in this case
surely re-echoed what Adam Smith said, that managers would never watch over
other people’s money with the same diligence they would watch their own.

Bad Faith
The Delaware supreme court find it easier to define ‘’ bad faith’’ than ‘’good
faith’’. The court has stated four categories of bad faith which are (1) actions
motivated by reasons that are not in the best interest of the company, (2)action
motivated by bad faith, (3) actions that involve deliberate violation of law (4)
dereliction of duty.65 Fiduciary duty of loyalty demands that the directors’
conduct be motivated by good faith that their action will better the interest of
the company and; therefore, any conduct not motivated by any reason other
than the best interest of the company will violate the fiduciary duty of loyalty.66

63
Caremark int’l inc, derivative litig. 698 A.2d 959 (del ch. 1996)
64
Clark W. Furlow, ‘’Good faith, fiduciary duties and the business judgment rule in
Delaware’’ (2009) 2009 U. L. R. 1061 p1076
65
Ibid p1071
66
Ibid p1071
However, I will like to point out here that the definition of bad faith as “action
motivated by bad faith’’ is still too ambiguous as this does not describe bad faith.

The role of shareholders in the UK and the US corporate governance

Some authors argued that shareholders ‘’ are the owners of the corporation and,
as such, are entitled to control it, determine its fundamental policies, and decide
whether to make fundamental shifts in corporate policy and practice."67
ZAKLAMA68 argued that since a company is treated in law as a separate legal
entity, shareholders cannot be considered as owners of the company.

No matter the your angle of view, I am of the opinion that the shareholders’
interests make up the company and no matter what we call it, these interests
can be translated into ownership. This is no mistake that the UK and the US
corporate governance tends emphasize the shareholders interest because they
are the investors and these shareholders are dispersed, none of whom has a
voting control. But the roles of shareholders in corporate governance in these
countries are substantially different.

Unlike the position of shareholders in the US, the UK corporate governance

system allows the shareholders to intervene directly in corporate governance.
UK shareholders can unilaterally amend by a special resolution the company’s
constitution which is quite different from the position in Delaware which require
that any amendment to the charter be suggested by the board after which the
shareholder may approve.69 In addition, the UK shareholders have greater power
to replace any director. Shareholders having five per cent of the voting right can
demand a meeting where a director may be removed by simple majority of an
ordinary resolution.70 It is also important to mention that the UK shareholders do
not face the regulatory challenges that the US securities regulation imposes on
coordinated action. The UK model article provides that ‘’the directors are
responsible for the management of the company’s business, for which purpose
they shall exercise all the powers of the company.’’71
67
’ Beyond Shareholder Value: Normative Standards For Sustainable Corporate Governance’’ (2010) 1 W. M.
B.L. Rev. 47 p70

68
Nicholas A. S. Zaklama, ‘’devident: shareholders’right, directors privilege’or
companies’curse?’’ (2000) 32 B.L. 22 p25
69
Christopher M. Bruner, ‘’ Power and Purpose in the Anglo-American Corporation’’ (2010) 50 V. J. I. L. 3 p605
70
ibid
71
ibid
Nonetheless, as in the US, it is clear that the board is ‘’ the most important
decision making body within the company’’72. However, differences exist. The UK
model article empowered the shareholders to ‘’direct the directors’’ by special
resolution ‘’to take, or refrain from taking, specified action.’’73 This system of
directing directors is not familiar to Delaware law though it placed the
shareholders in a strong position in discussion with the management. The UK
shareholders have leave governance to the board but when the company is in
trouble, they have greater power to influence the future of the company.74
The UK shareholders power of ‘’direct the directors’’ is an important one because
it illustrates the extent of board powers. The directors in the UK get their powers
from “delegation via the article and not from a separate and free grant of
authority from the State.’’75 Because shareholders suit is a developed
mechanism for redress in the US than anywhere else, perhaps it may be safe to
say that the greater power of the US shareholders to sue, either a derivative
action or class action has covered the gaps between the US and the UK
shareholders role in corporate governance.76 In the UK, the fact that the
directors owed their duties to the company, coupled with the rules on derivative
actions and the fact that directors are to pursue (in good faith) the interest of
the shareholders, makes it difficult for the shareholders to institutes actions.77
What is pertinent to mention here however, is that the UK shareholders having
the power to remove any directors who does not adhere to their interest has
overshadowed any advantages possess by the shareholders in the US, which
may proof as to why there is limited reliance on litigation in the UK.78

Conclusion
No doubt that the separate legal entity of a company is an outstanding feature
of an incorporated company. Showcasing its ability to organise large and
complex businesses through its distinct features of limited liability, perpetual
succession, capacity to hold property in its corporate name and ability to sue
and be sued among others. As shown above, partnership or Joint Stock

72
ibid
73
ibid
74
ibid
75
ibid
76
ibid
77
ibid
78
ibid
Company does not enjoy these features that made the corporate form a
preferred medium of transacting business.
Corporate form being the best form of business, its management has been of
interest to the government and stakeholders as well. This has prompted different
approach to good corporate governance system. The UK considers that, having a
good level of communication between the board and the shareholders is
necessary to achieve healthy corporate governance. Therefore, the shareholders
and the companies have the responsibility to ensure ’’comply or explain’’
principles is effective and a better approach than the US rules based system.79
All aimed at checking the powers of the directors. Subject to some constraint,
directors have the power to pursue business strategies and these constraints
have retained investors’ confidence.
As we have seen, directors are in a position of fiduciary to act in good faith on
behalf of the company and in the interest of the company and its shareholders.
He must exercise his duties with care and loyalty and his personal interest must
at all times not be in conflict with the company’s interest. Where he fails, he
cannot be exempted from personal liability. Although the shareholders using
their voting power can displace any director with whom they are displeased. We
have also seen that to operate a company successfully, a balance between the
shareholders and the managers is essential. This is because of the diverse
interests of the shareholders and the directors which, if it is left unchecked, can
bring down any successful enterprise.

79
Elliot Shear, et al, ’’Corporate governance in financial institutions’’ (2010) 74 C.O.B.1-28 p8