Do the Directors Duties Set Out in the Company Hinder Entrepreneurial Pursuits - Assignment Example

Do you think that the directors duties set out in the company law in your country hinder entrepreneurial pursuits of the directors within corporations? Give reasons for your opinion by identifying & discussing duties imposed by company law in your country, referring to examples, discuss whether or not those duties do or could result in a reluctance of directors to be entrepreneurial in corporate decision making. 1. Introduction The development of the corporate activities worldwide led to the increase of the legislation regulating these activities in all industrial sectors; in UK, the major priority of the Company Law has been the allocation of responsibility of the persons who are mostly involved in the planning of business strategies; the specific part of corporate activity belongs to directors who set the criteria for the development of their organizations’ plans and who have the responsibility for these plans’ failures and damages. In UK the legislator aiming to reduce the risks related to the decisions of corporate directors introduced a series of detailed rules, which should be used as the basis for evaluating the credibility of the corporate directors’ decisions and actions. The examination of these rules led to the assumption that in UK corporate directors are primarily free to use their own perceptions and criteria in developing their corporations’ strategic plans; however, the relevant decisions need to be carefully justified as the consequences in the case of failures or damages are severe – usually the corporate directors are called to take the responsibility for any failure in the corporate plan – the schemes available for the limitation of this responsibility are limited – for instance the possibility of ratification of the director’s actions, as explained analytically below. From this point of view, existing UK Company law can be regarded as leading to the reluctance of directors to be entrepreneurial in corporate decision-making. 2. Directors duties in the context of the UK company law In order to understand the effects of UK company law on the entrepreneurial pursuits of company directors it would be necessary to explain primarily the role of these individuals in modern corporations – as this role is described in the laws regulating the activities of directors in corporations across UK. In accordance with the 2006 Companies Act – section 250 – director is a term referring to ‘any person occupying the position of director’ (s250, in Calder, 2008, p.57); in accordance with Calder (2008) three are the roles within corporations that can be related to the director’s position: ‘the chairman, the chief executive and the company secretary’;1 The duties of directors within corporations are clearly defined in the 2006 Companies Act; these duties are also highlighted in other legislative texts, when specific activities of the corporation are to be evaluated and critically discussed; it should be noted at this point that the duties of directors in organizations of the private sector may be differentiated from the duties of directors in organizations of the public sector; the private are less likely to be supported by the state when they took initiatives that were risky – under the terms of the common practice; on the other hand, the directors in organizations of the public sector are not allowed to take initiatives; they are obliged to act under the guidelines of their supervisory authority; it is perhaps for this reason that the responsibility of directors of the public organizations is limited compared to that of the directors of the private sector.2 In accordance with the section 179 of the 2006 Companies Act each activity of corporate directors may be related to more than one duties;3 on the other hand, the duties of corporate directors are those defined in the UK law – duties that are not clearly set through the relevant legislation are not recognized as having a power of enforcement or as having any consequence on the directors’ position with their organization – referring especially to duties which are held – as an ethic – within a particular organization and which cannot have legal consequences in case of their violation.4 On the other hand, the duties of corporate directors are not only those included in the 2006 Company Act but also those mentioned by other legislative texts – at the level that these texts are applicable under specific conditions, when a relevant activity of the corporation is set under evaluation.5 One of the key duties of corporate directors is the duty of care and diligence – as described in the section 174 of the 2006 CA.; moreover, a company’s director is obliged ‘to promote the success of the company’6 – a duty set in the s172 of the CA; another duty of similar importance is the duty of loyalty – defined in the section 179 of the 2006 CA; the above duties are general duties, in the terms that they are likely to refer to all decisions and actions of corporate directors.7 Apart from the above duties, there are also duties that are involved in specific decisions and actions of corporate directors – for instance the duty for a ‘fair review of the company’s business’8 in regard to the directors’ annual business report – a duty set in the section 417 of the CA. 3. Effects of directors’ duties as described in the UK company legislation on the entrepreneurial pursuits of the directors within corporations The role and the power of directors within corporations are strictly defined in the relevant legal texts – as described above; in this context, the pursuits of directors need to be developed within a specific framework – ensuring that the rules regulating the directors’ activities within modern corporations are applied. In practice, the above target can be difficult to be fully achieved; for this reason, a framework of principles and rules, the corporate social responsibility (CSR) framework, has been developed aiming to increase the credibility of the activities of directors in organizations worldwide. One of the key advantages of CSR framework is that it can address the needs of both the organization and the directors – in terms that the interests of the former are related to the interests of the latter; towards this direction, it is noted by Idowu et al. (2009) that directors may show willingness in following the CSR rules as these rules can result to the increase of the organizational value leading to the increase of the directors’ wealth.9 Through a similar point of view, it could be noted that the rules set by the UK company law are likely to be supported by the companies’ directors – the improvement of the organizational performance and the increase of its performance will lead to the increase of the directors’ benefits – referring to both financial and non-financial benefits. In this context, the directors duties – as set by the UK company law – may not regarded as obstacles to the entrepreneurial pursuits of directors within corporations. Generally, it could be stated that the duties of directors as set in the UK company law are many, including the avoidance of political donations and expenditure;10 under the above terms, the ability of directors to take initiatives within the organization is related primarily to the rules used for the characterization of these activities – whether these actions and decisions are in favour of the company or not; in case of a positive answer, the corporate director is not held responsible for the damages caused to his organization. In the above text, the ratification of the director’s actions leads to the relief of the director from any responsibility for his actions as the company’s representative;11 it should be noted that the above rule can be applied only when it is clear that the director acted honestly and had not the intention of causing damage to the organization; an example of the above practice was provided in the case Re Duomatic Ltd [1969]12 a firm which had three directors; one of them increased the salary of one of his colleagues – directors – without asking for the permission/ verification of the general meeting; however, the Court held that the director did not acted on purpose, i.e. he did not want to cause damage to the organization; rather he followed a practice common in the specific field. From this point of view, the rules of UK company law does not necessarily cause delays or set obstacles to the entrepreneurial pursuits of directors’ in fact, these rules can be appropriately alternated if the needs of specific members of the organization have to be addressed – under the terms that such issue is appropriately proved. In general, the responsibility of directors in the context of the UK Company Law is higher compared to the responsibility of their colleagues in USA; for this reason, it is noted from Horrigan (2009) that in accordance with the UK Company Law ‘there is no ‘safe harbour’ for the directors’ commercial decisions’;13 moreover, it is made clear that the concept of ratification of the directors’ actions – as explained above – is the only mechanism available to the directors in corporations across UK in order for them to be protected against a potential failure in their commercial decisions. At this point, the following issues should be highlighted: the corporate director may not be held responsible for one or more of his decisions in case that he provides sufficient evidence that he acted in accordance with the law’s rules on directors’ responsibility.14 On the other hand, the claim that the decisions of a director led to the breach of one of his corporation’s contracts cannot establish his responsibility for the specific action; it is necessary that this breach caused damage to the other party.15 4. Conclusion The establishment of directors’ duties in corporations across Britain has been used as a tool for increasing the credibility of actions initiated by the specific individuals; the protection of the public interest has been the major criterion for the legal rules developed in the particular field. However, the content of these rules and the criteria for their application have led to the following controversy: despite the fact that innovation is a key requirement for the increase of organizational performance the engagement of directors in relevant initiatives faces a series of obstacles – resulted mostly by the strict rules regulating the duties and responsibilities of these individuals. On the other hand, the identification of the actual intentions of corporate directors in regard to their decisions and actions within their organization cannot be quite accurate – being influenced by the internal/ external organizational environment and by the directors’ personal perceptions and attitudes. The examination of the existing case law has led to the assumption that the initiatives of directors in corporations across UK are likely to be negatively evaluated by the Courts. For this reason, it is suggested that corporate directors in UK adopt the following practice: to ask for ratification in regard to all their initiatives – they would avoid the specific practice only when following practices commonly developed within their organization – and for which no opposition from the corporation’s shareholders or third parties would be expected to appear. Bibliography Boeger, N. (2008) Corporate social responsibility. Edward Elgar Publishing Bourne, N. (2010) Bourne on Company Law. Taylor & Francis Calder, A. (2008) Corporate Governance: A Practical Guide to the Legal Frameworks and International Codes of Practice. Kogan Page Publishers Dunne, P., Morris, G. (2008) Non-Executive Directors Handbook. Butterworth-Heinemann Hirt, H. (2004) The enforcement of directors duties in Britain and Germany: a comparative study with particular reference to large companies. Peter Lang Horrigan, B. (2009) Corporate Social Responsibility in the 21st Century: Debates, Models and Practices Across Government, Law and Business. Edward Elgar Publishing Idowu, S., Filho, W. (2009) Professionals ́ Perspectives of Corporate Social Responsibility. Springer Keenan, D., Riches, S. (2005) Business law. Pearson Education Verlag Goyang Media Ltd (2008) Companies Act 2006. BoD – Books on Demand Legislation Companies Act 2006 (c. 46) Corporation Tax Act 2010 (c. 4) Electricity Act 1989 (c. 29) Enterprise Act 2002 (c. 40) Finance Act 2003 (c. 14) Finance Act 2008 (c. 9) Railways Act 1993 (c. 43) Serious Crime Act 2007 (c. 27) The Companies (Cross-Border Mergers) Regulations 2007 No. 2974 Case Law Aberdeen Journals Ltd v The Office of Fair Trading [2003] CAT 11 (23 June 2003) Albion Water Ltd v Director General of Water Services (Dwr Cymru/Shotton Paper) [2005] CAT 40 (22 December 2005) Cobden Investments Ltd. v RWM Langport Ltd & Ors [2008] EWHC 2810 (Ch) (20 November 2008) Grupo Torras SA & Ors v Sheikh Fahad & Ors [1999] EWHC 300 (Comm) (24 June 1999) Holland v Revenue and Customs & Anor [2009] EWCA Civ 625 (02 July 2009) Kohli v Lit & Ors [2009] EWHC 2893 (Ch) (13 November 2009) Moore Stephens (A Firm) v Stone & Rolls Ltd (In Liquidation) [2008] EWCA Civ 644 (18 June 2008) Napp Pharmaceutical Holdings Ltd & Ors v Office of Communications [2002] CAT 1 (15 January 2002) ODonnell v Shanahan & Ors [2008] EWHC 1973 (Ch) (07 August 2008) OJSC Oil Company Yugraneft v Abramovich & Ors (Rev 1) [2008] EWHC 2613 (Comm) (29 October 2008) Re Duomatic LW [1969] 2 Ch 365 Shepherd v Williamson & Anor [2010] EWHC 2375 (Ch) (24 September 2010) Sisu Capital Fund Ltd & Ors v Tucker & Ors [2005] EWHC 2170 (Ch) (09 September 2005) Ultraframe (UK) Ltd v Fielding & Ors [2005] EWHC 1638(4) (Ch) (27 July 2005) Youlton v Charles Russell (a firm) [2010] EWHC 1032 (Ch) (13 May 2010) Read More