The Mechanisms by Which Directors Are Controlled in Their Management of Corporate Affairs - Coursework Example

Name: xxxxxx Tutor: xxxxxx Title: Management of Corporate Affairs Institution: xxxxxx Date: xxxxxx Introduction Provision of good corporate governance requires application of effective mechanisms that effectively control the management of corporate affairs. As a way of controlling the actions of directors in different nations, various mechanisms that are in line with laws of particular nations are usually applied in corporations so as to provide good corporate governance. Corporate governance concerns a lot with the nature and extent of individual’s accountability within the corporation. It also concerns with the mechanisms that are employed so as to minimize or eliminate completely the principal-agent crisis. The way stakeholders such as shareholders participate in achievement of corporation’s goals determines the nature of corporate governance that prevail in a given company. This paper therefore looks at mechanisms that control the management of corporate affairs by directors under UK law, German law and Delaware law (Fernando, 2009). Mechanisms that controls directors in management of corporate affairs under UK law In United Kingdom, corporate governance coordinates the duties and rights of shareholders, employees, directors and creditors. An important aspect in corporate governance is what mechanisms prevail in ensuring that directors are accountable in management of corporate affairs since directors normally have power of controlling an entity under company’s constitution. The law, in the United Kingdom, is friendly to shareholders as compared to other nations in Europe. Shareholders have been given a sole right to vote in the general meeting. Several issues such as company’s constitution reforms, issue resolutions and removal of members from the board of directors can be controlled in the general meeting. Shareholders expect directors to perform certain set of duties. They expect directors to execute their duties with competence, honesty and with a lot of loyalty to an entity. In case directors are underperforming, shareholders have been given the power to remove them by simple majority votes. As far as company’s constitution reforms are concerned, shareholders can change the constitution with three quarter majority vote. Shareholders can call for a meeting and propose for resolutions with a back up vote of five percent of the overall vote. They can also be supported for calling a meeting and for proposing for resolutions by any one hundred shareholders who have at least one hundred dollars each in form of shares (Fernando, 2009). A part from voting mechanisms, particularly when the mechanism does not work well for small shareholders, the duties of directors can be controlled by the court. The court usually ensures that directors conduct their duties with a lot of care, great skills and competence as expected for by a person undertaking office work. A high standard of performance is expected by the court particularly if the director posses any qualification that is special. As stated in section 1157, courts can however exempt directors from accounting for their negligence if they are found honest and would love to be exempted from compensating for their mistake (Fernando, 2010). In management of corporate affairs, directors’ duties are controlled through security markets, particularly in companies that have been publicly listed in stock market. In United Kingdom, the rights of shareholders to freely participate in trading their shares and to be handled equally by directors are strongly protected via takeover code. In stewardship code, that was currently drafted in 2010 by financial reporting council, strongly stresses upon the institutions to participate actively in affairs of governance by revealing their voting record and voting policy. The main objective is usually to make directors more responsible to investors of the capital (Horrigan, 2009). Horrigan, (2009) argue that Different from other company’s law in European nations, the company law in United Kingdom formally entails employees in corporate governance thus giving workers the mandate of controlling the directors’ corporate affairs. Under United Kingdom law, companies have been given a right to freely provide employees with the right to participate in general meetings as members. Employees therefore through participating in general meetings have a right to elect a given director whom they feel is competent enough in delivering the required services. In United Kingdom, as stated under information and consultation of employee regulations 2004, organizations that have at least fifty workers, through their directors, need to inform their labor force about huge economic matters and are also expected to consult about major transformations, such as redundancies. This law therefore controls the management of corporate affairs by the directors. Directors of companies in United Kingdom are expected to operate within the constitution of the company or the article of association. The article of association controls directors’ management of corporate affairs. The model article provides important procedure to follow when managing corporate affairs. The article gives employees and other stakeholders such as shareholders the mandate to remove directors who are working against them and also against the interest of the company as a whole. The company constitution also gives the directors the general power to manage and assign tasks to employees. The article of association gives shareholders power to sue directors if they are not complying with resolution, brought about by simple majority votes. The company’s article of association therefore greatly controls management of corporate affairs by directors (Mudambi & Ricketts, 2008). Mechanisms that controls directors in management of corporate affairs under German law Under the company law of German, public corporations have board structure that is dual. The supervisory board, that is, the directors of the board, under German law, is usually very separate from management board minus overlapping membership. The supervisory board or the directors of the board, under German law, have been authorized to appoint and supervise the managing board. They are also mandated to formulate main policies and strategies of the company. In the annual general meeting, shareholders have a right to receive important information and vote on a wide range of issues, incorporating mergers, capital enhancement, acquisitions and major business strategies transformations. Directors’ management of corporate affairs is thus greatly controlled by these mechanisms (Schön, 2008). The company law of German depends a lot on internal corporate institutions, the board and the annual general meeting to restrict the power of directors rather than the stock markets’ discipline. The constraints brought about by the institutions are planned to protect the interests of workers and creditor banks as organization’s essential stakeholders. Codetermination of labor, and employees’ incorporation into governance institution of the organization, Germany’s replicated highly planned labor relations at the level of the organization. Codetermination via powerful works councils and supervisory board representation embodied stakeholder vision of corporation as an institutional and organizational entity. The labor relations and company law develop structures that assist negotiation, corporation, compromise and agreement among the governance of an organization. The codetermination of work councils provides a more essential form of worker representation in company’s governance. Works council provides a great influence on how directors manage corporate affairs. Their capability to utilize information, codetermination rights and consultation provides great influence in the place of work. Works council also provides substantial influence in the work place via their power to request for employees’ economic harm that might be caused by managerial policy decisions. Codetermination of work council cooperatively coordinates labor relations within places of work staffed by employees that are highly skilled and productive. These mechanisms protect the interest of labor and capital thus controlling the directors’ management of corporate affairs. As a mechanism of controlling the management of corporate affairs by directors, German’s company law groups directors into management board and oversight body and the supervisory board. This is simply to differentiate between inside directors and outside directors. Under German law, the two groups of directors have significantly distinct responsibilities and work in various bodies of management. The management board members control the business corporation and are usually subjected to a broad-range of obligations that doesn’t compete with the organization. They also sometimes don’t take advantage of corporate chances. Members of management board as expected by the German do not receive any valuable item from third parties in exchange of doing activities that are connected with their duties in the company. The law gives the supervisory board authority of approving transactions between the corporation and a member of management board. This therefore implies that an interested director or the entire management board cannot approve the transactions (Fernando, 2010). According to Fernando (2010), German law has strict provisions that specifically control corporation’s loans to management board members. The law seeks to guarantee the independence of members of the supervisory board from board management. The influence of management board in selection of supervisory board members is not powerful since companies that have at least two thousand workers give shareholders the authority of selecting half of the supervisory board members while the rest are elected by the workers. The capability of management board therefore to influence selection of representatives of shareholders relies on whether the corporation is publicly held with a broad dispersed free float or is a corporation with one or many dominant shareholders. The board of directors is another mechanism that constrains management behavior in public companies. Under German law, the board of directors is expected to be elected by shareholders. They also protect the interests of shareholders in both good and bad performance of the firm. Since 1970s German has always had an essential two-tier system. Under the board of directors’ mechanism, the directors, as expected by law in German, oversees the management of the entity. The board of directors, as stated in the article of association, has a right to co-approve transactions that are very essential. The mechanism by which the information is passed within the organization controls directors in management of corporate affairs. Under German law, supervisory board is expected to meet only quarterly. The management board therefore needs to properly communicate to the supervisory board about its policies for future profitability and conduct of the business. This makes the supervisory board to be able to know the business and ensure internal control that is effective. The supervisory board’s chairman needs to be informed about any other essential event. The supervisory board, if necessary, can ask for any information about the organization. This therefore implies that the board of management is normally the mandate of setting agenda, planning for meeting documents and sends the documents on behalf of chairman of the supervisory board to members of the board. The management is thus in a position to direct the meeting and the flow of the information to its monitors. Mechanisms that controls directors in management of corporate affairs under Delaware law The corporation law in Delaware provides the concerned parties with unlimited freedom and power to structure and manage corporations. Several mechanisms therefore have been formulated under Delaware law to control the way directors manages corporate affairs. As a way of controlling the powers of individual director in management of corporate affairs, the board of directors can be formulated by corporations. Under Delaware law, the corporations are expected to be controlled under the direction of the board of directors. This therefore implies that the board, under the law, has exclusive power to instigate almost every corporate affair. As stated under section 141 of the Delaware general law, the company needs to be managed under the board’s direction. For instance, even if shareholders always have a right to vote on important structural transformations, such as consolidations, mergers or sales, leases or exchange of almost all properties and assets of the company, the board normally has a unique authority of allowing such kind of decisions to be voted for by shareholders and in case of exchange, lease or sale of properties or assets the board is not usually expected to consummate the transaction even if it has been approved by shareholders votes (Clarke, 2007). The board of directors has also a sole authority of deciding whether the corporation will pay dividends or not. A lot of powers of the board are usually redistributed in incorporation’s certificate. Even if this kind of amendment is normally expected to take place through shareholders votes, the board of directors, as stated in Delaware law, has an exclusive power to instigate the procedure of amending the certificate. A part from consents, shareholders are left with two avenues via which they can practice direct influence on their individual initiative. They can therefore, minus board approval, permit the dissolution of the company. They can also decide to influence the board via the by-laws of the corporation. The shareholders’ power to practice control over the organization via provisions of by-laws is somehow limited, provided that it might be a forward looking, common provision that establishes procedural needs that are not in conflict with certificate of incorporation or the law. Management of corporate affairs by directors can therefore be influenced by these instruments (Turezyn & Saunders, 2010). Without a special provision within the certificate of incorporation, the directors, rather than the shareholders, are usually provided with the duty of managing the business corporation’s affairs. The directors, when executing their duties, are normally given two initial fiduciary responsibilities to the organization and its shareholders. They are usually given the duty of care and loyalty. This therefore usually controls their management of corporate affairs. The courts in Delaware however held that every new responsibility has many additional responsibilities that are subsets of primary responsibility. Turezyn & Saunders (2010) argues that the use of duty of care mechanism in controlling the way directors manages corporate affairs requires directors to utilize the amount of care that any responsible person will carefully and prudently employ similar circumstances. It therefore expects directors to be able to understand all material information that is reasonably available to them before developing any corporate decision. The directors are also expected to work with requisite level of care when making decisions. The action of directors usually comprises a breach of duty of care only if their conduct rises to degree of gross negligence. The use of duty of loyalty mechanism requires that the corporation’s and shareholders’ best interests take precedence over personal interest or director’s bias that is not shared by shareholders. Under this mechanism, conflict of interest does not usually result into breaching the duty of loyalty. In the absence of approval of shareholders and directors, the conduct that comprise breach of duty of loyalty incorporates usurpation of corporate opportunity, competition among directors or officers in the company, inside trading and actions that have practical effect that perpetuate directors in the office. Establishment of information system is another way of controlling the management of corporate affairs by directors. As stated under Delaware law, the board has the ability to only oversee the management process if it has a way of gathering information. The need for information usually grows as the corporation continues to expand in size and complexity. A rational board is therefore expected to install a system of reporting information so as to take advantage of benefits that are given by corporations under the guidelines of federal organization. Business judgment rule mechanism can be used to control management of corporate affairs. The business judgment rule is a court-made rule obtained from statutory power provided by board of directors to control the business and corporate affairs. Directors under this rule are expected to act on an informed basis, in good faith and in a sincere belief that the action assumed was in corporation’s best interest. A court therefore, provided that the board complies with its responsibilities of loyalty and care, cannot exchange its judgment with that of the board if the decision of the board can be related to any rational purpose (Millstein, 2008). The controls are effective mechanisms of good corporate governance. The controls enable the board of directors to be informed, active and independent. The board of directors according to the controls is the powerful body that governs corporations. The board supervises all the corporate activities that occur in corporations. It also practices its mandate in the best interests of the company. The functions are usually practiced in terms of viability and maximization of company’s long-term value. The existence of board regulations provide a certain definition of purpose, obligations, functions and priorities of the body and the manner in which it works. Controls of information for the director permits directors to only approve matters that they either understand or which they fully agree with. The controls expects chairman of the board to foster debate and determine with support of the board secretary the information that need to be provided so as to ensure that directors can have opinion and sound judgment on the issue. The board chairman is also expected to request for any extra information or clarifications that is considered important. If necessary, directors can ask for external advice on the cost that might be initiated by the organization. Conclusion From the discussion it is clear that there are several mechanisms that control the management of corporate affairs by directors under German, UK and Delaware law. The controls, under UK law, German law and Delaware law are effective mechanisms of good corporate governance. In United Kingdom, the common mechanism that is usually applied in controlling the management of corporate affairs is the provision of Shareholders with a sole right of voting in the general meeting. Several issues such as company’s constitution reforms, issue resolutions and removal of members from the board of directors can be controlled in the general meeting by the shareholders. Shareholders under UK law have also been given powers of monitoring the competence of directors, thus controlling the directors’ management of corporate affairs. Shareholders expect directors to perform some duties with certain level of integrity. They expect directors to execute their duties with competence, honesty and with a lot of loyalty to an entity. In case directors are underperforming, shareholders have been given the power to remove them by simple majority votes. The actions of directors under UK law are also controlled by the use of courts, stock markets, employees and article of association. Under Delaware law, management of corporate affairs can be controlled by the use of board of director. Duty of care mechanism and duty of loyalty are also used in controlling corporate affair under Delaware law. Under German law, the management of corporate affairs by directors is controlled by application of internal corporate institutions, the board or supervisory body and the annual general meeting mechanisms. Bibliography Fernando A. C., 2009, Corporate Governance: Principles, Policies and Practices, Pearson Education India: New York. Horrigan B., 2009, Corporate social responsibility in the 21st century: debates, models and practices across government, law and business, Edward Elgar Publishing: New York. Mudambi R., & Ricketts J., M., 2008, The organisation of the firm: international business perspectives, Routledge: New York. Fernando A.C., 2010, Business Ethics And Corporate Governance, Pearson Education India: new York. Schön W., 2008, Tax and corporate governance, Springer: New York. Fernando C. A., 2010, Business Environment, Pearson Education India: New York. Clarke T., 2007, International corporate governance: a comparative approach, Routledge: London. Turezyn J., A., & Saunders S., R., 2010, Folk on the Delaware General: Corporation Law Fundamentals 2011, Aspen Publishers: New York. Millstein M., I., 2008, Annual directors' institute on corporate governance, Volume 6, Part 2008, Practising Law Institute. Read More