International Corporate Law and Governance: Westlands Group PLC - Case Study Example

Westlands Group PLC

Introduction

A good relationship between the stakeholders is necessary for a company to develop and achieve its goals. The company management needs to create a good rapport with the customers as well as the shareholders. Depending on the nature of the relationship that the management holds with the shareholders, the shareholders do bear influence on the decision made by the corporation. Shareholders, therefore, play a significant role in decision making in that they have to agree with the decision before it can be implemented. The shareholders are the sponsors of the company, and without their support, all the decisions made cannot be put into action. They have to be comfortable with the decision before they can support it financially. However, sometimes the shareholders can overstep their mandate or underperform as per the requirement. This report provides the rights and the responsibilities of the shareholders under the UK legislation, stipulating the division of responsibilities between the shareholders and the directors as specified under the provision of the UK Stewardship Code.

Rights of the Shareholders

In the past, the corporate world has been criticized because of minimal involvement of stakeholders in decision-making. While the shareholders remain to be the owner of the company through a share, there is a need for active participation. The shareholders' main duty is to sponsor the company. This duty, however, comes with its rights and privileges. The first privilege that the shareholders enjoy is the fact that they must be involved in all the decisions made in the company. As such, the shareholders must append their signatures through their representative to approve the decision. Therefore in line with decision making, the shareholders have a right to representation. They have to nominate or elect one of them or any other neutral person to represent them on the board.

In as much as they are represented to the board, the stakeholders still have the final decision on the decision-making process of the company in that they have to approve of the decision before it can be implemented. They, therefore, have a right to vote on the major issues affecting the company. This right to vote on the major decisions gives them the final say on the direction that the company takes. Nonetheless, the board must constantly involve the shareholders in making decisions so as to help in building trust and create confidence between the management and the shareholders.

As companies grow, they increase their assets and shares. These shares become available for people to purchase and become part of the stakeholders. Under the provision of UK stewardship code, the shareholders have the pre-emptive right that allows them to purchase other shares once the shares become available for purchase. These rights entitle the shareholder to a fair and reasonable opportunity to purchase shares sufficient to maintain their proportionate interest in the company. Through their shares, they have a right to ownership of the company. They are thus entitled to dividends depending on the proportion of their shares. Moreover, the shareholders also have a right to transfer their ownership by trading their stock.

The powers of the shareholder depend on the size of their shares. Therefore, increasing the shares means they are strengthening their authority. With authority vested upon them as the owners of the cooperation, the shareholders have the rights to sue wrongful act, recall nonperforming board members, run for the board of directors, request shareholder educational training program, and even call for a special meeting. According to the UK by-laws, 10% of the shareholders are needed to call for a special meeting. Moreover, they have the rights to meet with the board of directors and even recommend some amendments or propose policies to the board.

Shareholder Responsibilities

As the owners of the company, the shareholders must be involved in the running of the business. The investors have to be available and ready to perform their duties if they are to continue reaping the dividends that are yielded by the profits from the enterprise. As such, they have the responsibility to be present at the annual general meeting and other important shareholder meetings. It is through these meetings where important resolutions are passed. They have a role to play to ensure the successful running of the business. Also, investors have the responsibility to vote their representative to the board of directors and at the same time sue members of the board of anybody for wrongful act.

To create harmony and understanding between the directors and the shareholders, all the parties must know their roles. For instance, the laws that govern the role of each party in the company. The shareholders, therefore, have the responsibility of knowing what is in the by-laws. Through the understanding of the by-laws and the company vision and mission, they are expected to perform their duties and significantly contribute to the earning of the company. However, understanding the by-laws and company rules does not lie only with the board of directors and the employees. The investors, being the number one members of the cooperation, have the responsibility to understand their roles and play by the rules so as to create a conducive environment for the management to run the business. Above all, they have the responsibility to supervise the management depending on their knowledge of the goal of the firm.

The two – tier Board System

A two-tier Board system is a system of corporate company governance where there are two distinct boards responsible for the running of a company. In this system, there exists the board of directors and the supervisory board. The board of directors is responsible for the day-to-day running of the enterprise whereas the oversight board is in charged with the mandate of supervising the activities undertaken in the company. Despite there being a supervisory board, the board of directors performs its duties independently.

In the two-tier board system, the board of directors must comprise of at least three members and at most eleven members. The chairman of the board is elected or appointed from among the board members. The board of directors is charged with all management related issues and prepares annual governance report to be approved by the shareholders. On the other hand, the supervisory board is composed of representatives from all the stakeholders, thus, represents the interest of the stakeholders. It acts as an independent body and serves to monitor the management of the company. Though they do not possess the executive powers like the board of management, their duties include inspecting the company documents, inspect the state of the firm’s assets as well as request explanation from the management and the employees. The supervisory board also advises the management on some matters of management.

The two-tier board system is widely known and has been coveted for its enormous success. The advantages of the system include the clear distinction between the supervisory and management functions and responsibilities. The distinction gives the two boards independence and contributes to accountability in the company. Further, the two-tier system provides for greater opportunities for representation of all the stakeholders through the Non-Executive Directors (NED). The NED also acts as a counterbalance to the board of directors.

In the two-tier system, the executive board of directors performs the role of management whereas the supervisory board’s duty is to monitor the actions of the board of management. As such, the system provides a clear separation of the two functions. Moreover, the system is useful in case of transition. For example, when the board of directors has been disbanded, the supervisory board can be very resourceful in orienting the new board of directors, hence, creating a smooth transition. In extreme cases, they can also stand in until the new board of management is formed since it is mostly made of former board of management members.

However, despite the advantages associated with the two-tier system, there are some draw backs of the system. Given that the supervisory board only advises depending on the report they have collected from the governing board, there is a likelihood of being misled. Moreover, the advisory board does not have the executive powers; they only inspect the documents and request for explanation from the board of directors but cannot fire them. As such, there is always a tendency of the advisory board being non-committed at later stages.

The two-tier board system requires that both the boards be provided with the information. The two boards are, therefore, both required to contribute in the decision-making of the company. As a result, the decision-making process of this kind of board system is always delayed due to lower frequency of supervisory in board meetings and ineffective flow of communication. The system also requires a perfect relationship between the advisory board Chairman and the Chief Executive Officer of the board of directors for smooth flow of information and communication.

The Anglo-Saxon countries that adopt the civil law such as the Britain often have a one-tier board system whereas the countries with common law such as Germany often go for two-tier board system. In fact, the German corporate law requires that companies adopt the two-tier system. Therefore, Westlands Group PLC must understand that for them to enter the German market, they should be prepared to adapt a two-tier board system.

Corporate Social Responsibility (CSR)

It is the responsibility of every business to be of benefit to the society in which they operate. Companies give back to the society through different ways such as participating in charity works, giving portion of the profit to the community, and participating in environmental conservation programs among other things. Corporate social responsibility is the business practice that involves initiatives and programs that bring back the fruits of their success to the community. It entails key features as discussed in the next three paragraphs.

Companies have realized that to be a leader in business, they must practice corporate social responsibility. Corporate social responsibility involves a company conducting business based on social purpose. The company tries to align its business in a manner that it identifies with the needs of the community. Although the responsibility goes beyond the requirements of the law, it involves engagement between firms, government and the civil society. The practicing company does not have to be coerced by the law to take part in the social responsibility. The company practicing the corporate social responsibility has a clear theory of change. It has deep knowledge of the activity it is committing to and aims at leading the way in its implementation. The company needs to provide the surrounding community and the customers with the information necessary to help them to achieve their social responsibility.

The firm involved in social responsibility uses the process to prove its business values and attract more support and customers. As such, the features of corporate social responsibility involve a firm concentrating its effort in one social activity to win the support of the society. The firm, therefore, goes an extra mile even to partner with experts to achieve its social responsibility. Moreover, the services rendered to the community are not in themselves intended to generate profit. This brings us to another feature of corporate social responsibility which is volunteering. The concerned company does all these by social voluntarily and by the use of its resources.

Another feature of CSR is that the management of the company practicing it has the concept at its heart and believes that adopting it will increase the organization’s performance. As a result, the firm also practices ethical labor practices and puts effort to compensate for the effects of environmental degradation caused by its activities. The participation of a company in corporate social responsibilities is very dependent on its management. Therefore, anybody or firm looking to invest in a company practicing corporate social responsibilities should first understand the management of that particular company.

Given the benefits of participating in corporate social responsibility and the pressure from both the government and the civil society, most corporations have embraced social responsibilities. However, not all companies that practice the CSR are socially responsible. For example, a diamond company benefiting from resources from war-torn regions where child labor thrive cannot be considered socially responsible just because it uses its profit to serve its immediate community.

The management of a socially responsible company should be willing and ready to change the logic of the industry. For instance, the management can adopt an environmentally friendly approach to production in a manner that will force other companies in the industry to follow. The management of a socially responsible firm does not do things because of what it will look like, but rather because it is the right thing to do. They embark on doing the right things and plan on making it pay instead of doing a thing because it pays. Moreover, they take keen interest in addressing social injustices amongst them such as allowing women to occupy leadership position in their boards so as to attain gender balance.

A management of a socially responsible corporation will have the social responsibility embedded in the company's vision, and mission statements like in the case of Ben and Jerry's Company. Further, the management of a socially responsible company should be able to inspire and guide the employees in the areas of sustainable development and ethical business practices. Such administrations identify and reward the CSR champions in their corporation. Another characteristic of the management of a socially responsible corporation is that they recognize the role played by the community and the employees in accomplishing the task. As such, they train their employees and the members of the community on how to achieve the social goal. This way, the trained members of the community can continue with the good work even in the absence of the company.

Conclusion

The board of Westlands group as the shareholder of the company has several rights; key among them include the right to be involved in all the decisions made. The other rights of the board of Westlands group as a shareholder in other companies include the right to vote on major decisions, pre-emptive rights to allow them purchase shares, right to sue wrongful act and the right to recall non-performing board members. Nevertheless, the board of Westlands group has responsibilities which include knowing what the bylaws stipulate, being present in the general and shareholder meetings, and a duty to supervise the management of the respective companies.

When incorporating a German company in its business, the board must be ready to adopt the two-tier board system as that is what the German law requires. The two-tier system is a type of management where there are two boards of management; one involved in the supervisory role. The system has an advantage of having a distinction between the supervisory and management boards, representing all the stakeholder interest as well as being reliable in transition. However, the system also has drawbacks such as requiring a perfect relationship between the two management bodies to run smooth and the decision-making process taking a long time.

The board of Westlands group PLC should look at the following feature to know a company with a good corporate social responsibility; for instance, the company must be practicing CSR voluntarily without being coerced by the law. The practicing company must also have the interest of CSR at heart to the point of having it embedded in their vision and mission statements, and willing to change the logic of the industry.