How Successfull the Companies Act 2006 Is - Essay Example

? How successfully does the Companies Act 2006 promote shareholder engagement with their company Introduction The development of effective rules in regard to business activities in markets worldwide can be characterized as a challenging task. Market conditions are not stable, increasing the risks for potential failures, either in the short or the long term. On the other hand, the response of consumers to products and services is differentiated under the influence of changes in market trends, the entrance of new competitors and the developments in technology. Under these terms, the efforts of legislators to establish provisions that can effectively protect the rights of shareholders do not always have the expected results. In UK, where commercial activities are highly developed, the specific problem is clearer. The introduction of the Companies Act 2006 aimed to cover the gaps of previous legal rules in regard to the regulation of companies across UK. It seems that this target has been achieved. It should be examined whether the provisions of Companies Act 2006 manage to secure the protection of shareholders rights, as a factor influencing their engagement with the organization. The ability of the Companies Act 2006 to promote shareholder engagement with their organization is reviewed in this paper. It is proved that the specific legislative text has highly contributed in the increase of shareholder engagement with their organization, even if, in certain cases, the simultaneous development of other initiatives, such as the intervention of the Financial Services Authority (FSA) has been considered as necessary. The elements of shareholder engagement with their organization are critically explained aiming to show the value of the specific concept for the standardization of business performance in UK, as also in other countries worldwide. 2. Shareholder engagement with their company and the Companies Act 2006 2.1 Aspects of shareholder engagement with their company as related to the Companies Act 2006 Shareholders have a critical role in the success of businesses in all industries. This fact has been highlighted in the case law developed in the particular field. For example, in Item Software (UK) Ltd v Fassihi it was held that the director who has acted without taking into consideration the interests of the company violated the organization’s rules and he should be punished accordingly. In West Coast Capital (Lios) Limited (2008), a case heard before the Scottish Courts, it was held that a director has the responsibility ‘to promote the success of the company for the benefit of its members as a whole’ (Warren J. in West Coast Capital Limited 2008). The term ‘company’ in the above case is used in order to reflect the members of the company and not the company as a legal entity. According to the above cases, directors have to align their decisions with the interests of the company’s members, meaning primarily the shareholders (Birds et al. 2010, p.197). These cases reflect the value of shareholders in modern organization; therefore, the shareholder engagement with the organization should be a critical part of corporate governance, so that business success is secured. In the legal rules focusing on the regulation of companies, the protection of the interests of shareholders is also recognized as a key priority. In Companies Act 2006 the value of shareholder engagement with their organization can be derived from various provisions, as for example, the s32, which defines the obligation for providing constitutional documents to the company’s members, the s91, where the requirements for share capital are set, the sections 146-151 that refer to the information rights of a company’s members, the sections 171-177 that set the obligations of directors in regard to their position and so on (Companies Act 2006). The forms of shareholder engagement with their company are not common in all organizations. However, in general, the efforts of the shareholders to support all plans of their firm are considered as signs of their engagement with the particular organization, even if other terms of such relationship are not met (Spedding 2008). In accordance with the Department of Trade and Industry, UK, the willingness of shareholders to support their organization is related to the information provided to them in regard to all aspects of organization (Department of Trade and Industry 2004, p.5-6, in Spedding 2008, p.257). It is explained that by being appropriately informed on their organization’s operations, shareholders can evaluate whether organizational decisions are justified or not and also whether severe risks are related to the organization’s plans either in the short or the long term (Department of Trade and Industry, 2004, p.5-6, in Spedding 2008, p.257). From a similar point of view, Sun, Stewart and Pollard (2011) note that shareholder engagement is related to the corporate governance system of each organization. It is explained that the accountability of a firm’s management team is one of the key prerequisites so that institutional investors are kept engaged with the specific firm. In many organizations the control over the decisions of management team is not effective. It has been revealed that organizations that fail in developing a trustworthy corporate governance system are not able to secure the engagement of their shareholders (Sun, Stewart and Pollard 2011). This fact sets in risk the market in whole since institutional investors are given the impression that the local legal system is not able to protect their rights. For minimizing these risks, the Financial Services Authority has announced that it will monitor closely ‘the entire governance and the risk framework of regulated financial institutions’ (Sun, Stewart and Pollard 2011, p.160). This initiative does not necessarily indicate gaps in the provisions of the Companies Act 2006 in regard to the full protection of shareholders’ interests. On the contrary, it shows the value of shareholder rights in the context of the British market. Indeed, as analyzed below, the provisions of Companies Act 2006 offer an effective framework for the promotion of shareholder engagement with their company. 2.2 Does the Companies Act 2006 promotes effectively the shareholder engagement with their company? Traditionally, the engagement of shareholders with their company has been considered as a significant element of organizational success, meaning that those firms that have managed to strengthen their relationship with their shareholders have more chances to overcome easily the market’s turbulences and barriers (Institute of Directors 2010). The strong financial crisis of 2008 revealed the inability of organizations to develop proactive relationships with their shareholders (Institute of Directors 2010); in other words, the above crisis made clear that the engagement of shareholders with their organization is not as developed as believed, a phenomenon common in most organizations worldwide (Institute of Directors 2010, p.88). The importance of shareholder engagement for the British law is reflected to the following fact: ‘in 1997, when the Company Law Review Steering Group was established for reviewing existing law provisions on company law’ (Institute of Directors 2010, p.207), four priorities were set. The promotion of shareholder engagement was one of these priorities, a fact that indicates the role of shareholder engagement in the success of organizational plans (Institute of Directors 2010). Lord Sainsbury noted that shareholder engagement is quite critical for securing a high level of investment on UK companies (Sheikh 2008, p.2); he explains that shareholder engagement can be promoted only if ‘the trust of shareholders to the UK governance system is kept at high levels’ (Sheikh 2008, p.2). At the next level, reference should be made to the following fact: in the past, i.e. before the introduction of the Companies Act 2006, the laws regulated the activities of companies in UK were based on the term that most firms in UK have been public companies with high profits and numerous shareholders (Sheikh 2008, p.2). Such condition is now absent. Most of UK firms, about the 95% of them, have ‘five or fewer shareholders’ (McIntyre 2010, p.505); even companies that are listed in the Stock Exchange are likely to have limited number of shareholders, aiming to control their activities more effectively (Sheikh 2008). The Companies Act 2006 addressed the needs of firms of all sizes eliminating those rules, which would not be of any value now, since the structure of organizations in UK has been changed, as explained above, and unnecessary rules constituted burdens preventing companies in UK to develop their activities (Sheikh 2008). The engagement of shareholder with their organization has been positively influenced by the rules of Companies Act 2006, at the level that the specific legislative text covered the gaps described above. The increase of the engagement of shareholders with their organization has been a key target of the Companies Act 2006. Particular emphasis has been given on the participation of shareholders in the voting process. In accordance with the Institute of Directors (2010), a high percentage of shareholders in each organization avoids voting, meaning that when a voting process is in progress other persons, authorized by the shareholders, appear and vote in behalf of the shareholders (Institute of Directors 2010, p.88). The problem has been expanded at such level that it has been part of the discussions in regard to the reform of laws regulating the activities of companies (Institute of Directors 2010); the above discussions led to the development of the Companies Act 2006 where the government is given the right ‘to compel institutional shareholders to disclose their voting records’ (Institute of Directors 2010, p.88). According to McIntyre (2010), the Companies Act 2006 has highly contributed in the increase of shareholder engagement. This target was achieved in the following way: the Act emphasized on the relationship between shareholders and directors at the level that the above relationship can enhance organizational performance. Indeed, it was proved that by improving communication between shareholders and directors, the trust of the former to the organization is increased, promoting also the shareholder engagement (McIntyre 2010, p.505). Such outcome has been supported by the following fact: through the provisions of the Companies Act 2006 directors are urged ‘to focus on long –term investment rather than on short-term profits’ (MacIntyre 2010, p.505). The concept of promoting the interests of shareholders and secure the funding of the organization’s plans has become known as ‘Enlightened Shareholder Value’ (McIntyre 2010, p.505). This concept incorporates a series of principles on which the communication and cooperation between the directors and the shareholders need to be based. These principles ensure that directors are aware of their responsibilities, as related to their position in the organization, and that shareholders are given the chance to participate in the growth of the organization but also in the development of critical organizational plans. The recognition of the value of shareholders, as explained above, results to the increase of shareholder engagement, either in the short or the long term. Moreover, the Companies Act 2006 established the obligation of directors to secure the interests of stakeholders (Blowfield and Murray 2008). In the context of the above Act the right of shareholders to sue directors in case that the latter act against the existing social and environmental interests is also clearly defined (Blowfield and Murray 2008, p.223). The specific provision is one of the initiatives promoted through the Companies Act 2006 for enhancing shareholder engagement with their organization. In the study of Quick, Turley and Willekens (2008) reference is made to the provisions of Companies Act 2006 that most promote shareholder engagement. It is explained that the enforcement of shareholder engagement through the above legal text aims to secure the high level of investment on companies across UK, ensuring institutional investors on the quality and the level of control on business practices (Quick, Turley and Willekens 2008). The issues which have been highly emphasized in the Companies Act 2006 and which are related to shareholder engagement are the following: a) the section 493 of the Companies Act 2006 gives the right to the Secretary of the state to set the rules on which ‘the disclosure of the terms audit contract will be based’ (Quick, Turley and Willekens 2008, p.219), b) in the context of the section 527 of the Companies Act 2006, shareholders are given the right to ask questions to auditors in regard to a future meeting during which auditing issues will be discussed (Quick, Turley and Willekens 2008, p.219), c) the section 505 of the Act defines that the name of the auditor partner should be included in the audit report; the details of the audit firm that monitored the auditing process should be also incorporated in the above report (Quick, Turley and Willekens 2008, p.219). 3. Conclusion In all companies, the level of shareholder engagement with their organization is used as a factor in order to decide on the perspectives of the organization within its industry. Through the decades the size and the structure of organizations have been alternated, aiming to face the market challenges and control risks related to daily operations. The Companies Act 2006 has introduced for supporting companies of different characteristics to standardize their position and strengthen their financial status. The above legal text has particularly emphasized on shareholder engagement as an element of business success. The promotion of ‘the ‘Think Small First’ approach’ (Letsas and O’Cinneide 2011, p.330), meaning the interests of shareholder minorities within each organization, reflects the role of the particular Act in promoting shareholder engagement. On the other hand, shareholder engagement is a complex concept, referring to different organizational aspects, as explained above. This means that the promotion of shareholder engagement within a specific organization requires the continuous monitoring of organizational plans and operations, so that all initiatives taken are aligned with the interests of the company, a phrase which is commonly used for describing the interests of shareholders, as analyzed earlier using also relevant case law. The provisions of the Companies Act 2006 focusing on shareholder engagement can be characterized as quite satisfactory; however, it would be necessary for mechanisms to be developed so that the enforcement of these rules to be adequately supported. References A. Books Birds, J., Hildyard, R., Miles, R., and Boardman, N. (2010) Annotated Companies Legislation. Oxford: Oxford University Press. Blowfield, M., and Murray, A. (2008) Corporate Responsibility: A Critical Introduction. Oxford: Oxford University Press. Institute of Directors (2010) The Director's Handbook: Your Duties, Responsibilities and Liabilities. London: Kogan Page Publishers. Institute of Directors (2009) The Handbook of International Corporate Governance: A Definitive Guide. London: Kogan Page Publishers. Letsas, G., and O’Cinneide, C. (2011) Current Legal Problems 2010. Oxford: Oxford University Press. MacIntyre, E. (2010) Business Law. Essex: Pearson Education. Quick, R., Turley, S., and Willekens, M. (2008) Auditing, trust and governance: regulation in Europe. Oxon: Taylor & Francis. Sheikh, S. (2008) A Guide to the Companies ACT. Oxon: Taylor & Francis. Spedding, L. (2008) The due diligence handbook: corporate governance, risk management and business planning. Oxford: Butterworth-Heinemann. Sun, W., Stewart, J., and Pollard, D. (2011) Corporate Governance and the Global Financial Crisis: International Perspectives. Cambridge: Cambridge University Press. B. Case law Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244 West Coast Capital (Lios) Limited [2008] CSOH 72 C. Legislation Companies Act 2006 Read More