An Accurate Reflection of the State of Corporate Crime - Literature review Example

Despite developments in the law, the ability of companies to commit crime remains effectively unrestricted. To what extent is this ment an accurate reflection of the state of Corporate Crime Introduction The problem of corporate crime has often been seen as a concrete manifestation of a capitalist society that both implicitly and explicitly validates the survival-of-the-fittest theme. In the context of companies striving to keep ahead of the pack, so to speak, this would normally mean resort to any and all means to slaughter the competition and enjoy unbridled profits. Many scholars believe that regulatory mechanisms have, to a large extent, been inadequate in controlling corporate crime. Say Mokhiber and Weismann (1999): At one level, corporations develop new technologies and economies of scale. These may serve the economic interests of mass consumers by introducing new products and more efficient methods of mass production. On another level, given the absence of political control today, corporations serve to destroy the foundations of the civic community and the lives of people who reside in them. There are, of course, many different types of corporate crime. There is what is known as "corporate manslaughter", as when it involves a corporation causing a fatal disaster resulting in massive loss of lives. A good example of this would be the Union Carbide case of 1984. A more common type of corporate crime is one involving embezzlement by the directors of the corporation, resulting in prejudice to the minority shareholders and the public at large. In cases involving tax evasion, there is prejudice to the government as well. There is no dearth of examples of abuse of fiduciary duty by company directors. This paper will focus on the latter type of corporate crime, wherein fraud is perpetrated by directors wielding control over the corporation in a bid to earn maximum profit at the expense of the other shareholders. Corporate Governance and Corporate Crime The move to develop the notion of corporate governance and make it apply to corporate enterprises in the United Kingdom began in the late 1980s to the early 1990s, as a result of corporate scandals like Polly Peck and Maxwell. The idea of corporate governance is rooted in the idea of agency. Those who infuse capital into a business enterprise hire managers to run the business for them and see to its day to day affairs. The board of directors and the institutional investors also play a role in the monitoring and control of firms. However, the relationships of these players - to each other and to the general public -- must not be left alone and unregulated. It is imperative that there be well-established rules for companies to follow as they navigate the course of the growth. (Demott, 1999.) In a company, virtually all policy-making is left in the hands of the Board of Directors or on the majority shareholders. The definition of director given at section 741(1) of the Companies Act 1985 'includes any person occupying the position of director by whatever name called. This definition can also be found in the Insolvency Act 1986 section 251 and the Company Directors Disqualification Act 1986 section 22, where it is extended to include shadow directors. While allowing directors to control business strategies has merit - for instance, decision-making is streamlined and businesses largely depend on the need to be able to respond to issues not only with soundness but also with dispatch -- some problems inevitably arise. In theory, a director, holding as he does a position of trust, is a fiduciary of the corporationi. As such, in cases of conflict of his interest with those of the corporation, he cannot sacrifice the latter without incurring liability for his disloyal act. The fiduciary duty has many ramifications, and the possible conflict of interest situations are almost limitless, each possibility posing different problems. There will be cases where a breach of trust is clear, as where a director converts for his own use funds or property belonging to the corporation, or accepts material benefits for exercising his powers in favor of someone seeking to do business with the corporation. In many other cases, however, the line of demarcation between the fiduciary relationship and a director's personal right is not easy to define. The law has attempted at least to lay down general rules of conduct and although these serve as guidelines for directors to follow, the determination as to whether in a given case the duty of loyalty has been violated has ultimately to be decided by the court on the case's own merits. What is clear, however, is that shareholder conflicts are prevalent in virtually all jurisdictions and the law has to formulate appropriate channels of redress in order to resolve these conflicts. (Miller, 1999). Specific cases of corporate crime There is no surfeit of examples to demonstrate how minority shareholders and their interests can be prejudiced by the director or those with controlling interests in the corporation. One of the most typical situations of self-dealing is the fixing of directors' and officers' compensation. (Barak, 1971). This may take various forms - per diems, salaries and profit-sharing arrangements like bonuses, stock option plans, and the like. Executive compensation in the United Kingdom is typically comprised of the following elements: a base salary, an annual bonus element, and long term pay. Long term pay consists of share options and long-term incentive plans (Conyon, Peck, et. al. 2000). In other jurisdictions, as a general principle, directors as such are not entitled to compensation for performing services ordinarily attached to their office, unless the articles of association or the by-laws expressly so provide or a contract is expressly made in advance. In theory, compensation to executives and employees are incentives to greater efficiency. Since the corporation ultimately benefits by this increased efficiency, such forms of compensation would be intra vires, and the fixing of the amount thereof would usually be within the business judgment of the directors. However, abuses may arise where the executives concerned are at the same time directors of the corporation, or have a dominating influence over them. (Conyon, Gregg and Machin, 1995). As insiders, directors and officers have access to confidential information relating to the business of the corporation. Their fiduciary position prohibits them from using any such information to benefit themselves or any competitor corporation in which they may have a more substantial interest. Though there are benefits, one being that information is more quickly disseminated in the markets, improving the choices of decision makers (King, Roell, Kay, Wyplosz. 1999), there are obvious marked costs, particularly to minority shareholders. Another situation which may involve the duty of loyalty of a director is when he occupies such a position in two corporations dealing with each other. It is not unusual to find the name of one person in the directorate of different corporations not necessarily because he has big investments therein, but because his services may have proven to be valuable and efficient. Many times, these corporations of which he is concurrently director, may have some business ties, such as that of supplier and customer, or manufacturer and distributor. Or the corporations may be competitors. The original attitude in many jurisdictions was to prohibit dealings between corporations with interlocking directors. They were concerned mainly with protecting shareholders from overreaching directors. With the tremendous growth of the corporate enterprise and the greater familiarity of the courts with the corporation, came an increasing realization that interlocking relationships often presented very definite advantages to the corporation. This realization produced a gradual change in judicial attitude which today is no longer one of prohibition but one at least of tolerance. Be that as it may, the idea of interlocking directors is susceptible to abuse and can endanger the company. Current state of the law and new developments A. Influence of the Combined Code and other Codes of Practice The Combined Code on Corporate Governance lays out the benchmarks of good practice with respect to board composition, remuneration, accountability and shareholder relations. All companies that have been incorporated in the United Kingdom and listed on the Main Street of the London Stock Exchange have the obligation to disclose the ways in which they have conformed to and applied the Combined Code to their governance practices. According to the Financial Reporting Council, the main changes made to the 2003 Code were: to amend the existing restriction on the company Chairman serving on the remuneration committee to enable him or her to do so where considered independent on appointment as Chairman (although it is recommended that he or she should not also chair the committee); to provide a 'vote withheld' option on proxy appointment forms to enable shareholders to indicate if they have reservations on a resolution but do not wish to vote against. A 'vote withheld' is not a vote in law and is not counted in the calculation of the proportion of the votes for and against the resolution; and to recommend that companies publish on their website the details of proxies lodged at a general meeting where votes are taken on a show of hands. The Combined Code traces its roots to the Cadbury Report or the 'Financial Aspects of Corporate Governance Committee' led by Sir Adrian Cadbury. It "outlined a number of recommendations around the separation of the role of the chief executive and chairman, balanced composition of the board, selection processes for non-executive directors, transparency of financial reporting and the need for good internal controls." This was followed by the Rutteman Report and the Greenbury Report, then by the Hampel Report which laid the ground for the Combined Code of 1998, which was superseded by the Combined Code of 2003. In order to better implement the Combined Code, the Turnbull Committee was created to draft the Turnbull guidance. Be that as it may, many legal thinkers believe that the legal climate in the United Kingdom is still weak in regulating such forms of corporate oppression. While in the US the market for corporate control, manifest in takeovers, provides a powerful incentive towards good corporate governance, these mechanisms have remained weak in the UK. (Garrod, 1996.) B. Companies Act 2006 The major purposes underlying the UK's Review of Company Law is to protect shareholder rights, to ensure directors' responsibility, to promote corporate governance - all of which will, in the end, facilitate a better policy environment for commerce and trade. The Companies Act - previously known as the Company Law Reform Bill -- received its second reading in the House of Lords on January 11, 2006, and received Royal Assent on November 8, 2006. As stated by Lord Sainsbury, Parliamentary Under-Secretary of State at DTI, the purpose of the Act is to "to constantly update company law in response to changes in the way companies do business"1. The Act essentially expands the existing derivative action, and allows shareholders to sue the directors for a wider range of breaches, namely in respect of an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust. Another significant change is that a shareholder who has brought proceedings must apply to court for permission to continue the claim. The Act also contains restrictive provisions on the issue of ratification by the majority. Members who are personally interested in the ratification or who stand to gain from it will not be allowed to vote, when such ratification involves a director's negligence, default, breach of duty or breach of trust. The consequence of this is that it will now become easier for shareholders to obtain permission to continue a derivative action. If leave of court is granted, the company must reimburse the shareholder for the costs of litigation. By and large,, there is more to be gained than lost by the developments ushered in through the Companies Act of 2006. Though legal and economic conceptions have both rested on and have been shaped by the normative implications of ownership. (Grantham, 1998), it should also be animated by equity and corporate responsibility. For indeed, if what is sought in the long-term is a robust commercial system supported by a legal regime that protects rights, accommodates as many players as possible, then it must be a system that will not countenance fraud or breach of duty or corporate crime of those wielding power. In sum, the developments have been promising and are certainly an improvement over the previous legal environment where corporations conduct business with impunity and unbridled by any restrictions. However, the jury is still out as to whether these laws can be meaningfully implemented. References Barak, Aharon. "A Comparative Look at Protection of the Shareholders' Interest: Variations on the Derivative Suit." International and Comparative Law Quarterly, Vol. 20, No. 1 (Jan. 1971), pp. 22-57. Conyon, Martin; Gregg, Paul; Machin, Stephen. "Taking Care of Business: Executive Business in the United Kingdom." The Economic Journal. Vol. 105. (1995). 704. Conyon, Martin; Peck, Simon; Read, Laura and Sadler, Graham. "The Structure of Executive Compensation Contracts: UK Evidence." Long Range Planning 33 (2000) 478-503. DeMott, Deborah A. "The Figure in the Landscape: A Comparative Sketch of Directors' Self-Interested Transactions" Law and Contemporary Problems, Vol. 62, No. 3, Challenges to Corporate Governance (Summer, 1999), pp. 243. Garrod, N., Environmental Contingencies and Sustainable Modes of Corporate Governance, Paper presented, Faculty of Economics, University of Ljubljana, Sept. 96. Grantham, Ross. "The Doctrinal Basis of the Rights of Company Shareholders." The Cambridge Law Journal. Vol. 57 (1998). 554-588. King, Mervyn; Roell, Ailsa; Kay, John; Wyplosz, Charles. "Insider Trading." Economic Policy, Vol. 3, No. 6 (Apr., 1988), pp. 163-193. Miller, Sandra K. "How Should U.K. and U.S. Minority Shareholder Remedies for Unfairly Prejudicial or Oppressive Conduct Be Reformed" American Business Law Journal, Vol. 36. (1999) Mokhiber, Russell & Weismann, Robert. (1999). Corporate Predators: The Hunt for Mega- Profits and the Attack on Democracy. Common Courage Press. Read More