Corporate Law and

Corporate Governance
Lecture 9
Relevant reading
• Chapters 15 & 16 Dignam
Agenda
• Corporate Governance debate in the UK
• Response of the Industry
• Response of the Government
Background to the UK Debate
• Unaccountable managers.
• Underperformance of the companies.
• Solution differed both in the US and the UK.
• Where as the US focused on the shareholder primacy.
• The debate in the UK focused on increased participation of employees
and on curtailment of the managerial discretion.
Bullock Committee (1977)
• Report of the Committee on Industrial democracy that advocated the
benefits of the increased employees participation.
Thatcherism
• 1980s took a whole new course.
• Thatcher hugely admired US’s free market approach.
• Public Sector Industries were privatized (Telecom, Gas, Water,
Electricity).
• Thatcher reforms changed the course of corporate governance
debate.
• Generate employment by focusing on economic tools such as interest
rate to channelize the inflow of the capital in the UK.
• Industrial democracy was replaced by shareholder primacy approach.
• Recession in the late in 1980s led to the reform of listed companies.
• Three major companies collapsed (Bank of Credit and Commerce
(BCCI), Polly Peck, Robert Maxwell Group.
• Corporate governance reform eventually became a political issue.
• Industry ventured to carry out self regulation with aid of Bank of
England.
Industry’s Response
• The Cadbury Committee
• The Greenbury Committee
• The Hampel Committee
The Cadbury Committee (1992)
• Focused on the financial aspects of corporate governance.
• Sir Adrian Cadbury emphasized that quality of financial reporting
could be improved if boardroom accountability was improved.
• It gave recommendations on the issue.
Recommendations
• Key role of the board; and that major transactions should be decided
by the board(not just the senior managers).
• Key roles of managing director (CEO) and chairman should not be
combined as it leads to concentration of power.
• Board should have adequate number of Non Executive Directors
(NEDs) to carry significant weight on the board decisions.
• Listed company should have three sub-committees on the board to
cover audit, appointment and remunerations.
• Accountability process would be ensured by having NEDs on each of
the sub-committee.
• Remuneration committee wholly or mainly to be made up by NEDs.
• Audit committee should have at least 3 NEDs.
• Majority of the recommendations were implemented by the London
Stock Exchange.
• Not binding as listing rules but appended with them.
• No penal consequences for non-compliance.
• The company was required to explain why it did not comply.
• NEDs was the go-to solution to the problems with the listed
companies for Cadbury.
Two problems
• Firstly, Cadbury did not sufficiently delve on the “independence” of
NEDs.
• Consequently, friends, ex-managers, and managers of other
connected companies sat on the boards as NEDs.
• Secondly, it did not specify whether NEDs should be in majority on
the main board and also allowed executives to sit in the sub-
committees that made it hard for NEDs to be effective.
The Greenbury Committee
• By 1995 large public outcry on executives remunerations.
• John Major had conceded to putting a restraint on it.
• Again the industry responded not the government.
• A committee was set up headed by Sir Richard Greenbury (Chairman
Marks & Spencer at the time).
• A report came out in 1995 that focused on the core issue which was
directors deciding their own pay (conflict of interest)
Recommendations
• No executives on the remuneration committee (inherent conflict of
interest).
• Share options should be replaced by long term (3 years) performance
related criteria.
• Higher levels of salary disclosure in annual accounts.
• Ideally directors should have one year rolling contracts but two years
is also acceptable.
• Recommendations, as with the Cadbury, adopted by the LSE, in a non
binding manner.
• Problems identified were correct but solutions proposed were
impractical.
• Greater disclosure only resulted in further hike in the directors
remunerations as now they had better idea of what their competitors
were paid.
• Consultants were hired in the boardrooms to advise on
remunerations – factor contributed to salary hike.
The Hampel Committee
• Cadbury & Greenbury committee should be incorporated in one super
code called the Combined Code.
• Non-Executives should have a head making three power bases i.e.
Managing Director, Chairman, Leader of NEDs.
• Institutional investors to consider voting in AGMs.
• Remuneration details to be made more clearer and should include
hidden costs such as full costs of pension provision.
• Labour came in power in 1997.
• Had an enormous impact on the regulations of the industry.
• For instance, Bank of England (BOE) was removed as the primary
financial regulator because it was viewed as being too close to the
regulated.
• Major organizations including the London Stock Exchange were
placed under the Financial Services Authority.
Company Law Review Steering Group
(CLRSG)
• Margaret Becket, Minister Department & Trade Industry was of the
view that Hampel Committee did not produce sufficient reform.
• Corporate Governance was taken by the government then as the key
area in company law review.
• CLRSG was tasked to achieve the afore-referred objective.
• CLRSG lost its freedom when suddenly Beckett was replaced by
Stephen Byers.
• The committee then focused on enlightened shareholder value.
(encourage the enlightened managers).
• CLRSG Final Report concluded that company law needed to “think
small first”.
• Small companies greater in number.
• Government did not find time to place the report in its legislative
agenda.
• Collapse of Enron changed that.
• Lord Wakeham, important pillar in the UK establishment, Chairman of
Press Complaints and Commission, was member of Enron Audit
Committee.
Two folds: White Paper of 2002
• First, Directors’ duties to include other constituencies, which was
called “enlightened shareholder value” approach.
• Second, to introduce a form of corporate constituency reporting:
annual report of the directors should include a section on the impact
of company’s activities on stakeholders.
Formulation in the Companies Act, 2006
• 172 Duty to promote the success of the company (1) A director of a
company 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
its members as a whole, and in doing so have regard (amongst other
matters) to— (a) the likely consequences of any decision in the long
term, (b) the interests of the company’s employees,,
• (c) the need to foster the company’s business relationships with
suppliers, customers and others, (d) the impact of the company’s
operations on the community and the environment(e) the desirability
of the company maintaining a reputation for high standards of
business conduct, and (f) the need to act fairly as between members
of the company.
• The section retains the shareholder primacy and at the same time
compels directors to consider the interests of the company’
stakeholders.
• “Have regard to” will mean; give proper consideration to.
• The Independent Review of NEDs (The Higgs Review) page 411, read
it
Pakistan’s Company Act, 2017

• 204. Duties of directors.-(1) Subject to the provisions of this Act, a director of a company
shall act in accordance with the articles of t(2) A director of a company shall act in good
faith in order to promote the objects of the company for the benefit of its members as
a whole, and in the best interests of the company, its employees the shareholders the
community and for the protection of environmenthe company.. (3) A director of a
company shall discharge his duties with due and reasonable care, skill and diligence and
shall exercise independent judgment. (4) A director of a company shall not involve in a
situation in which he may have a direct or indirect interest that conflicts, or possibly
may conflict, with the interest of the company. (5) A director of a company shall not
achieve or attempt to achieve any undue gain or advantage either to himself or to his
relatives, partners, or associates and if such director is found guilty of making any undue
gain, he shall be liable to pay an amount equal to that gain to the company.
Cheers!!!