The Corporate Governance - Article Example

COMPANY LAW INTRODUCTION Corporate governance concerns the systems by which companies are directed and controlled The topic should not be studied in isolation within any one country. Instead, corporate governance is becoming an important issue in all industrial economies, and students of the topic need to be aware of what is occurring outside their respective countries. As trade barriers fall, markets expand, information flows improve, and restrictions on investment disappear, it will become progressively easier for investors of one country to invest in corporations in another. Movement towards a worldwide capital market could in turn have a substantial impact on corporate governance in individual countries. (2) In other words it is the body of rules, whether by convention, agreement, or national or international legislation, governing the dealings between persons in commercial matters. Business law falls into two distinctive areas: (1) the regulation of commercial entities by the laws of company, partnership, agency, and bankruptcy and (2) the regulation of commercial transactions by the laws of contract and related fields. In civil-law countries, company law consists of statute law; in common-law countries it consists partly of the ordinary rules of common law and equity and partly statute law. Two fundamental legal concepts underlie the whole of company law: the concept of legal personality and the theory of limited liability. Nearly all statutory rules are intended to protect either creditors or investors. There are various forms of legal business entities ranging from the sole trader, who alone bears the risk and responsibility of running a business, taking the profits, but as such not forming any association in law and thus not regulated by special rules of law, to the registered company with limited liability and to multinational corporations. In a partnership, members "associate," forming collectively an association in which they all participate in management and sharing profits, bearing the liability for the firm's debts and being sued jointly and severally in relation to the firm's contracts or tortuous acts. All partners are agents for each other and as such are in a fiduciary relationship with one another. Limited-liability Companies or Corporations The company or corporation, unlike the partnership, is formed not simply by an agreement entered into between its first members; it must also be registered at a public office or courts designated by law or otherwise obtain official acknowledgment of its existence. Under English and American law the company or corporation is incorporated by filing the company's constitution (memorandum and articles of association, articles or certificate of incorporation) signed by its first members at the Companies Registry in London or, in the United States, at the office of the state secretary of state or corporation commissioner. THE LEGAL FRAMEWORK GOVERNING BRITISH [companies overview] In Britain, the vast majority of companies are incorporated under the Companies Act 1985. The Act creates a distinction between private companies and public limited companies. Only a tiny fraction of companies incorporated in Britain are registered as public limited companies .Nevertheless, from a corporate governance perspective, they are of primary importance. A private company cannot apply to have its equity traded on a stock exchange, and debates about corporate governance in the United Kingdom have focused almost exclusively on companies that are publicly quoted. In the United Kingdom, most public companies that have their shares quoted for trading have been admitted to the Official List maintained by the Stock Exchange and are known as "listed" companies. A listed company is obliged to comply with the Listing Rules of London's Stock Exchange (commonly referred to as the "Yellow Book").The Yellow Book regulates the conduct of key transactions and imposes substantial disclosure obligations on listed companies .If a listed company breaches a provision of the Yellow [*pg 9] Book, the Stock Exchange is entitled to publicize the infraction and, if necessary, can suspend trading of the company's shares. British companies have corporate constitutions composed of two documents: the memorandum of association and articles of association. In the ordinary course, a company's articles of association vests the authority to manage the business in the hands of the board of directors and gives the shareholders the power to choose who sits on the board. Though the directors of a U.K. public company are authorized to run the company, they usually do not carry out day-to-day corporate decision-making activity. Instead, pursuant to a clause in the articles of association, the board delegates its powers to individuals holding executive offices with the company. The full-time executives then make the decisions regarding hiring and firing, assigning work, launching product lines, setting prices, and other important managerial matters. In a typical U.K. listed company, a number of senior full-time executives sit on the board, joining a group of "outside" or "non-executive" directors who are not involved with the affairs of the company on a day-to-day basis. Outside directors fulfill two key functions. First, they provide full-time executives with support and assistance as they carry out their managerial tasks. For example, they may offer advice on the basis of special expertise or foster links with other organizations. Second, they monitor executive decision-making. This involves reviewing the performance of management to ensure that those in charge are acting in the shareholders' interests and are complying with the legal duties, regulatory requirements, and ethical imperatives associated with the operation of a public company. An Abstract: The UK has embarked on a fundamental review of company law. The first stage of the process was completed in July 2001 and reform proposals are now being considered by the government. Modernization of company law is part of a drive to facilitate enterprise and enhance the attractiveness of the UK as a location in which to do business. This paper, which was first prepared for the 9th Singapore Conference on International Business Law, considers how well the proposed new legal framework measures up as a regulatory product that will be attractive to business and foster business competitiveness. Proposals in three areas are examined closely: simplification so as to promote business creation and growth; corporate governance and directors' duties; and the institutional framework of regulation. I suggest that if the simplification proposals are implemented in their current form UK company law will become much clearer and more comprehensible. Greater clarity should ensure some competitive advantages. In the area of corporate governance and directors' duties, the strong, continuing preference for detailed legal rules suggests that policymakers are skeptical about the ability of the market to put in place effective corporate governance controls without significant state intervention. Whether the preference for detailed rues supported by tough (often criminal) sanctions strikes the right balance between managerial freedom and investor protection is open to question. With regard to the institutional framework of regulation, my assessment of the proposals to expand the regulatory responsibilities of accounting bodies so as also to cover general company law is that these seem likely to promote a shift away from self-regulation towards greater public institutionalization of corporate regulation, a result that sits uneasily with the presumption against state intervention which was adopted as a guiding principle at the outset of the reform initiative. (3) Modern trends The sheer size of the largest limited-liability companies, or corporations-especially "multinationals," with holdings across the world-has been a subject of discussion and public concern since the end of the 19th century. For with this rise has come market and political power. While some large firms have declined, been taken over, or gone out of business, others have grown to replace them. The giant firms continue to increase their sales and assets, by expanding their markets, by diversifying, and by absorbing smaller companies. Diversification carried to the extreme has brought into being the conglomerate company, which acquires and operates subsidiaries that are often in unrelated fields. The holding company, with the conglomerate, acts as a kind of internal stock market, allocating funds to its subsidiaries on the basis of financial performance. The decline or failure of many conglomerates, however, has cast doubt upon the competence of any one group of executives to manage a diversity of unrelated operations. Empirical evidence from the United States suggests that conglomerates have been less successful financially than companies that have had a clear product-market focus based on organizational strengths and competencies.(1) The structures of most large corporations are really the equivalent of a congeries of semi-independent companies. In some cases these divisions compete against one another as if they were separately owned. The picture has been further complicated by growth across national boundaries, producing multinational companies, principally firms from Western Europe and North America. Their enormous size and extent raise questions about their accountability and political and economic influence and power. Corporate Social Responsibility The financial results delivered by a company in today's economy are no longer the only defining measure of its strength. Increasing importance is being placed on each company's approach to corporate social responsibility and environmental (green) sustainability in particular. Many companies are beginning to recognize that sustainability can translate into business opportunity or, just as importantly, protect the company against prejudicial selection. AMR Research surveys show that 82% of respondents will select suppliers according to their environmental stance within the next two years while 41% already do. Nigel Montgomery, research director at AMR Research, will examine how companies are approaching the subject of environmental management and the role information technology plays in support of this goal.(4) The social role of the large company Some company executives believe that their companies should act as "responsible" public institutions, holding power in trust for the community. Most companies engage in at least some public-service projects and make contributions to charities. A certain percentage of these donations can be deducted from a corporation's taxable income. Most of the donated money goes to private health, education, and welfare agencies, ranging from local hospital and charity funds to civil-rights groups and cultural institutions.(1) Conclusion The contemporary social and economic importance of business corporations is beyond dispute. The millions of corporations throughout the world dominate the mining, manufacturing, and service-industry sectors of most developed and many developing nations. When observing international perspectives on insolvency and local and international perspectives on corporate law, it is acknowledged that the creditors' bargain vision is dominant, although regularly criticized. This submission expresses the need for a broader approach and encourages the development of corporate social in both corporate law but more specifically raises it in the corporate insolvency context. I suggest we engage in further enlightened discussion and we could potentially lead the world in developing a corporate social approach not just for corporate law but for corporate insolvency law as well. (5) Works cited 1) Britannica encyclopedia May 11, 2008. 2) Brain R. Cheffins. Current Trends in Corporate Governance: Going From London to Milan Via Toronto. Comp. & Int'l L. May 11, 2008 http://www.law.duke.edu/shell/cite.pl'10+Duke+J.+Comp.+&+Int'l+L.+5 3) Eilis Ferran. Company Law Reform in the UK. 2008. University of Cambridge. May 11, 2008 http://papers.ssrn.com/sol3/papers.cfm'abstract_id=294508 4) Penton Media. Corporate Social Responsibility: How to Get Green with IT. 2008. Epicor and Progress Software. May 11, 2008 http://www.industryweek.com/EventDetail.aspx'EventID=533 5) Christopher F Symes. Submission to CAMAC on Corporate Social Responsibility. May 11, 2008 http://www.camac.gov.au/camac/camac.nsf/byHeadline/PDFSubmissions_2/$file/CSymes_CSR.pdf Read More