Critical Evaluation of the Impact of the Combined Corporate Governance Code - Coursework Example

A Critical evaluation of the Impact of the combined Corporate Governance and the Company Act 2006 in UK Introduction Companies dominate in our lives in all ways round. They form about 50% of the globe’s biggest economies. These companies’ turnovers exceed the GNP of many countries of the world. In their pursuit of making profits, they roam the globe and owing no loyalty to state, society, or people. The decisions made by companies, in pursuit of their profits sometimes can scupper and even undermine government policies with people having little saying in their operations (Dent, 2006).1 Therefore, because of these, there is need for corporate governance to be brought closer or into play to govern the operations and decisions made by corporations. Background 2Mitchell and Sikka (2005 p. 2) argue that, “Company executives play their selfish games, enriching a few and impoverishing many; shareholders, employees and consumers are routinely ripped-off, sold worthless pensions, endowment mortgages and other financial products.” They further accuse corporations; being playthings of their bankers, directors, lawyers and accountants that are accountable to nobody. They suggest that corporations are practicing corporate governance that is bad and being accountable to society in such ways: Tax avoidance-thus reducing investment in society by deceiving governments out billions of money in terms of tax Auditors are producing reports worthless than the papers they are drafted on and the accounting practices of British either have holes which are more than Swiss Cheese. Corporations are putting their profits before people regardless of their attempts looking caring and socially responsible. Shareholders of companies lack sufficient information, economic or political resources that are required to management accountable of their decisions. CEOs and chairpersons set their own salaries, and sit as non-executive directors in salaries committees. Institutional investors luck sufficient interest although they have the required resource genuinely improving corporate governance. Therefore, because of the aforementioned issues, there are need-bringing companies under democratic control. However, the very governments and pressure groups that are supposed to enforce this are unwilling, unable or have been bought off. Thus, because of unaccountable corporate power, fabric of society, family structures, and quality of life have been damaged. Therefore, it is because of these issues and their escalations there has been recent upheaval of the law concerned with the duties of directors in the UK. 3The directors are required to be accountable for their duties as far the affairs of their corporations are concerned through a number of mechanisms (Taylor, 2010). Thus, failure to fulfill these duties, directors can be held liable and ultimately be prosecuted in courts of law. Critical Evaluation After a couple of years, the duties of directors of companies were enshrined in the rules of common law & equitable principles. The Companies Act 2006 (chapter 2 of part 10) however, has been codified and is now acting as the guide for a couple of management tasks of directors upon, which they are held liable if they fail to act properly. This came into effect on 1 October 2007 or 2008 when the financial life of almost all parts of the world was in turmoil. Sahlman, (2010) states that, most actions of directors actually contributed to the financial crisis that began in the year 2007.4 Therefore, in this paper we are going to examine the effectiveness of the duties that were codified in the Company’s Act 2006 to tame the actions of directors of companies. This codification was meant providing greater clarity to directors of what was expected of them and making the law accessible; a codified duties statement would help in correcting the defects in the common law in situations it was inappropriate to modern business practice. Finally, codification was necessary to addressing the scope of director’s duties on whose interests company affairs are ran. Part 10 of the codified law states that, directors of companies owe their duties to the benefit of all members as whole. Thus, this includes all the individual duties that are contained in ss. 171-177. The codified law hence came with propositions making directors accountable for their duties. These can be discussed under the following subheadings: Good Faith S. 172 require that directors act in good faith unlike in the previous duty in common law, which was loosely structured. This concept suggests that directors while making their routine decisions in running the affairs of the companies should act in such ways promoting the company’s success. Thus unlike in the predecessor law where directors were required to act bon fide, the codified law gives the courts a chance to examine whether the directors acted in the interest of the company and not for personal interest hence providing provisions for directors to be held liable in cases where there actions injure the company (Worthington, 2001).5 Either there was no application of reasonableness test in the common law to determine whether a director breached his duty as long as his or her intention was believed to be for the interest of the company. The new law either like its predecessor provides no avenue for directors to be held liable for their actions as long as they prove they acted honestly in the interest of the company. However, it provides one situation; reasonableness can be an issue where a director actually fails to consider if an action is in the interest of the company. In Charterbridge Corp Ltd v Lloyds Bank Ltd, a director failed considering an action being in the interest of the company. The judge, Pennycuick J suggested that, such a situation require assessing whether an honest and intelligent person would have acted causing the whole circumstances. Therefore, by introducing the clause of promoting company success, the new company Act 2006 would be seen meeting the fitness of purpose to address the contention of Mitchell & Sikka. Success Directors of companies should act towards promoting the company’s success. Success was regarded as a slippery and vague term in the in the previous duty. However, there were concerns by the Confederation of British Industry as to how success would be measured, but it was define as the achievement of the company’s objectives and goals. 6Thus, to address this issue, the codified law states that the company’s success can be determined by the good faith judgement of directors. Therefore, the interpretation of company’s objectives by directors is what is imperative to the determination of the company’s success. Codified law thus places responsibility on directors for which they would be held accountable (Strätling, 2003). 7For instance, in his response on Feb. 2006, to parliament, Lord Goldsmith articulated on what success entailed saying that for a business company to succeed, it will to increase its mean long-term value; the companys decisions and constitution may also lay an appropriate success model and strategies for the company. It is thus essential for the members’ company members to define the goals and objectives they want to achieve either through the traditional way when members do it during company inception by members or the old style when they are stipulated in the company’s memorandum. This is however changing with the principles remaining unchanged for the members who want to define the goals and objectives that they want to achieve. For most investors, however, money is there most important objective to increase the long-term value of the company through re-investment (Lords Grand Committee, 2006).” “Benefit Members as a Whole” Previously, the law and principles of corporate governance demanded that directors should act in the interest of the company. However, with the codified Company Law Act 2006, directors of companies should act in the interest of “members as whole (Davies, 2005).”8 This implies that directors are not only accountable to present shareholders but also to the future shareholders. For instance, in his response to parliament, Lord Goldsmith articulated on what the expression “members as a whole” means. “The duty of directors is to foster the success of a company to the advantage of “members as a whole or collectively but not to act in the interest of only specific, a section majority or in the interest of directors who are also shareholders in the same company.”9 Therefore, directors are obliged to be accountable for their actions occurring after even when present members of the company cease being members.10 Thus, by introducing the clause “members as a whole” the new company Act 2006 would be seen meeting the fitness of purpose to address the contention of Mitchell & Sikka. The Prescribed Factors This provides that in the course of discharging their duties of promoting the company’s success, directors should pay attention to a list of factors to avoid accountability. Margaret Hodge articulated this saying however that, “a director will not be required to consider any of the factors [in s.172(1)] beyond the point at which to do so would conflict with the overarching duty of promoting the company’s success.”11 Thus, if directors of companies discharge their duties while taking into account the prescribed factors and honestly act in the good faith of company, then they can get off the hook for personal liability arising from their decisions. However, the interests of members as whole would not be enhanced for instance, if the company’s employees are on strike, are discontented, customers of the company are dissatisfied with its products or operations. Thus, from this perspective the Company’s Act 2006 would be regard as ineffective to addressing the contention of Mitchell & Sikka if the directors of the company act in such a way to address the problems facing the company in a bid to promote its success. In addition, some instances may arise where the prescribed factors may be inconsistent with overall premise of promoting the company’s. Thus, in such situations directors will dismiss the factors in the course of making their decisions hence concurring with what Margaret Hodge states in the aforementioned. Secondly, some situations may arise when one or more of the prescribed factors are in conflict with interest of members as a whole. CLRSG recognized that, there would be conflict between the shareholders’ interests and the prescribed factors mentioned in s. 172(1) if the company’s long-term interests are anything to go by e.g. terminating a long-term contract of supply or plant close down which can have a negative effect on the shareholders returns. Thirdly, is the contention arising from different interests stated in 172(1) (a)-(f) affecting the premise of promoting the company’s success?12 Thus because of the competing nature of these factors it is impossible to determine which factor to choose for promoting the company’s success. Either because of this conflict, directors find it difficult balancing them with the stakeholders theory. For instance, directors find themselves in a dilemma between choosing buying an innovation, which is likely to promote environmental greening but has an adverse impact on workers’ jobs.13 Because of this contention, it becomes difficult weighting the factors to determine which one is to be select.14 Thus, because of this challenge, directors can use a balancing exercise to foster their own interests since they have greater discretion in choosing which interests are worth taking into account (Roe, 2001).15 Consequently, this will result to shareholders having difficulties monitoring the actions of directors, which are well conceal hence allowing them to deny any accusations of breaching their duties upon which they are held responsible for their decisions. Thus, from this perspective the Company’s Act 2006 would be regard as ineffective to addressing the contention of Mitchell & Sikka given the gap and the conflicting nature of the prescribed factors. Conclusion Arguably, given that the actions of directors would promote the interests of non-shareholders without breaching their duties for which they can be held liable implies that the decisions made by directors would promote the success of company for the advantage of “members as a whole.” Thus, if this objective can be achieved, there are low chances that the shareholders will complain that directors have taken into account the interests of other stakeholders. It is thus probable that the enactment of the Company’s Act 2006 would have little effect in the UK corporate world because many directors of public and large private companies considered the interests found in s. 172(1) even before the enactment of the legislations (Alcock, 2009).16 Therefore, from the aforementioned discussion and illustrations, it still evident the problematic corporate governance issues related to duties and accountability of directors are yet fully to address even with the enactment of the new Companies Act 2006, which was meant to tame the actions of directors and hold them accountable for their decisions. Thus, it’s not clear if company directors will embrace a broader range of interest or they will further the past modus operandi of their interests to avoid accountability (Jensen, 2001). However, the legislation should be embrace because it has contributed, to bringing transparency and accountability in companies by ensuring directors bears the consequences of their decisions. Bibliography Legislation UK Statutes Company Act of 2006 Lords Grand Committee, 6 Feb. 2006, column 256. Secondary sources Alcock, A., “An accidental change of directors’ duties?” (2009) Dent, D., “Corporate Governance : Still Broke, No Fix in Sight” (2006) Jensen, M., “Value Maximisation, Stakeholder Theory and the Corporate Objective Function” 7.3 (2001) Mitchell, Austin Vernon, and Prem Sikka, Taming the corporations, Basildon UK: Association for Accountancy & Business Affairs, (2005) Roe, M., “The Shareholder Wealth Maximization Norm and Industrial Organization” (2001) Taylor, P., “Enlightened Shareholder Value & the Company’s Act 2006” (unpublished PhD Thesis, May 2010). Birbeck College: University of London at 189 Sahlman, W., “Management and the Financial Crisis (We have met the enemy and he is us.)” Harv. Bus. Sch., Working Paper No. 10-033 Accessed 7 April 2014 Strätling, Rebecca, "General Meetings: a dispensable tool for corporate governance of listed companies?." Corporate Governance: An International Review 11.1 (2003) Worthington, S., “Reforming Directors’ Duties” 64 (2001) Read More