Comparative Corporate Governance and the UK Companies Act 2006 - Assignment Example

Comparative corporate governance BY YOU YOUR SCHOOL INFO HERE HERE Comparative corporate governance Introduction Businesses manufacture and distribute services and goods to customers and maintain the ability to create wealth in terms of wage payments, taxes procured for government services and even interest payments. Costs include capital and skills development of the labour force and have influence on the external environment as well such as pollution. Therefore, businesses have many stakeholders, including vendors, local communities, the government, investors, banking institutions and other creditors and even internal employees. Therefore, it is critical to a national economy and to stakeholders that both economic and social concerns are regulated to ensure that the business is operating in a responsible manner giving consideration to all stakeholders. This is the nature of corporate governance. Corporate governance is the methodology by which a business is managed, directed and controlled. This includes legal regulatory systems and ensuring that management activities are aligned with stakeholder satisfaction with emphasis on improving Board strategies and agendas (Tricker 2009). The development of policies and rules that ensure responsible business behaviour encompass sound corporate governance (Clarke 2007). This essay explores what is meant by the concept of corporate governance justified through examination of case law. After identifying the legitimate meaning of corporate governance, the essay compares the Anglo-American model of governance with other international governance models to determine which model is more successfully aligned with emerging corporate trends. What is meant by corporate governance? The UK Companies Act 2006 identifies the duties of a company’s Board of Directors which are reflective of UK common law. The duties include ensuring appropriate promotion of corporate success, utilising effective judgment, illustrating reasonable care, avoiding conflicts of interest, not accepting third party benefits, and publicly declaring interest in various transactions (Companies Act 2006). How, though, does the Companies Act 2006 define effective corporate governance? This can be defined by examining a legal case decision, The Northampton Regional Livestock Centre v. Cowling (2014) which found that a director of the company exhibited breach of duty in relation to engaging in a conflict of interest situation. The large livestock company had decided to divest a real estate property in an effort to restructure the business. Unable to attract buyer interest in this property, Northampton Regional Livestock Centre decided it would be more effective to attempt to sell the property through a real estate agency, MCL. Richard Cowling, the Chairman of the Board at MCL, was also a partner in the MCL. In the role of Chairman of MCL and as a selling agent for the divesting Livestock company, Cowling was in a position to act in the interests of both the property vendor and the purchaser. In this scenario, MCL received a payment of over £700,000 by Northampton Regional Livestock Centre and a sum by the purchaser, Earlplace Limited, on a handshake agreement between MCL and Earlplace when MCL served as a facilitator to flip the property for a rapid, subsequent sale to another purchaser. In the aforementioned case, Mr. Cowling was on the Board of Directors for MCL and managed, through a rather unethical transaction, to procure well over £1 million for MCL from two different parties, the vendor and the purchaser. Because Northampton Regional Livestock had been unable to find a buyer, it was found that Mr. Cowling exploited the Livestock company by selling the property to Earlplace for £2.5 million (less than its valuation) and, on the very same day of this transaction, flipped the property at a price of £5 million to another party (Bailii 2014). A large group of minority shareholders of Northampton Regional Livestock demanded an investigation which ultimately led to the court decision citing breach of duty for MCL and Mr. Cowling. The Companies Act 2006 serves as the foundation for seeking remedies when a director does not comply with law iterating the importance of avoiding conflict of interest. Conaglen (2005) reinforces the importance of maintaining fiduciary duty for stakeholders as a legally-bound representative when engaging in governorship over financial matters that affect other parties. In The Northampton Regional Livestock Centre v. Cowling (2014), the court’s decision iterates that when a Board director engages in a conflict of interest scenario, becoming a recipient of remuneration from the vendor and a purchaser in a transaction, it impacts stakeholders negatively (in this case the minority shareholders of Northampton Regional Livestock) who would have benefitted from a sale price nearing £5 million, rather than only £2.5 million, if the agent, MCL, had been diligent in performing the sale competently and ethically in favour of the livestock company. Hence, as this particular case points out, what is meant by corporate governance is to avoid conflicts of interests, avoid receiving benefits from a third party (which can corrupt decision-making and impact stakeholders), and promote the success of a business (as mandated by the Companies Act 2006). By not using care in decision-making and engaging in conflict of interest, Mr. Cowling impacted the financial position of MCL and the reputation of the firm in relation to societal viewpoint, both detrimental to a large corporation. In highly competitive markets, a firm’s brand (identity) is the most valuable asset for achieving corporate and competitive success (Nandan 2005). In yet another case law example, how to properly define corporate governance has been solidified. In William Campbell v. Peter Gordon Joiners Limited (2013), the court found that the director of Peter Gordon Jointers Ltd was liable under Section 1 of The Employer’s Liability (Compulsory Insurance) Act 1969. Section 1 of the Act states that all businesses in Great Britain must maintain insurance which insures against bodily injury to employees (Health and Safety Executive 2012). The courts not only found liability on behalf of the company for failing to maintain adequate insurance for bodily injury, but upheld that the 1969 Act gave specific rights to an injured individual to seek damages when directors breach this obligation. Campbell, the pursuer, had been injured whilst employed with Peter Gordon Joiners and the company, in an insolvent situation, could not make appropriate payments to sustain proper liability insurance. What makes this case law scenario most intriguing is that the pursuer, William Campbell, had cited Section 172 and Section 174 of the Companies Act 2006 which assert that directors have a duty to promote company success and to exercise reasonable skill, care and diligence (Companies Act 2006). Whilst the judge iterated that Peter Gordon, the company’s director, had breached obligations under the 1969 Act, the judge found that Section 172 and Section 174 did not see that these duties could be translated as a duty toward employees to protect against personal injury during the course of employment (Bailii 2013). This particular case seems to illustrate that the UK’s legally-enforced perspectives of corporate governance are more considerate of corporate fiduciary responsibilities and ensuring corporate profitability and general success, with limited regulatory language that emphasises a legal obligation to employees. In this case, the presiding judge referred to precedents which awarded damages to employees for failure to comply with insurance liability obligations, however these judgments were founded on common law with no court utilisation of the Companies Act 2006 to justify what constituted a judgment decision. Should this particular case give rise to the question that what is meant by corporate governance is unbalanced in terms of iterating a duty toward employees as compared to a duty to the company? It would seem so. The Companies Act 2006 does give power to directors to make provisions for an employee in the event of the cessation of business (Companies Act 2006). However, this is not legally mandated and the Act asserts that such provisions may be enacted by directors only if a proper resolution has been determined by the Board, as iterated in section 247 of the Act. Healy and Palepu (2001) iterate that construction of an ethical code of conduct is common with companies to emphasise obligations to employees, however these are autonomous conduct codes not mandated by government legislation guaranteeing such adherence to protecting employee interests. English tort law maintains many regulations which ensure director compliance in protecting shareholder rights (Elliott and Quinn 2013). Hence, it can be reasonably concluded, from a legal perspective, that what is meant by corporate governance is, primarily, protecting the company and its shareholders (an economic perspective) rather than emphasising a duty to be compliant to socially-oriented considerations. For instance, the Companies Act 2006, Schedule 15, states: “that a person on whom a requirement has been imposed under section 89L (power to suspend or prohibit trading of securities in case of infringement of applicable transparency obligation), has contravened that requirement, it may impose on the person a penalty of such amount as it considers appropriate.” (Parliament of the United Kingdom 2006, p.693). The Companies Act explicitly identifies a duty to shareholders and the likelihood that a director that breaches these obligations will incur penalties. What, then, is meant by corporate governance from a legal perspective: Satisfying the rights and expectations of shareholders and avoiding liability for the company with minimal compliance mandates for principled and decent consideration toward satisfying employee needs. A comparison of the Anglo-American and European models of governance The Anglo-American model was implemented under the ideologies which are congruent with free market beliefs and capitalism. These values assert significant autonomy for businesses in areas of decision-making and setting market prices on goods and services with minimal regulatory influence by government (Hacker and Pierson 2010). In the Anglo-American model of governance, the primary actors maintaining a legally mandated set of duties, and those who can be held liable for breach of duty, are the Board and senior management. Concurrently, the shareholders rights and interests are well-protected by appropriate compliance mandates for directors of a firm. The most significant aspect of the Anglo-American model is emphasis on fiduciary duties of Board members and executives. The legal definition of maintaining a fiduciary responsibility is for directors never to put their own corporate interests above others (namely the shareholder) who are owed a legally-supported fiduciary obligation (US Legal 2013). Board members and executives, under this model, must consistently ensure adequate protectionism and proper oversight of all financial matters related to corporate growth and profitability and as it pertains to sustaining shareholder expectations. British tort law serves as the foundation by which fiduciary duties are ensured and where investors are guaranteed to be free of damaging losses as a result of unethical or improper duty of exercising reasonable care and skill (Bagshaw and McBride 2008). Hence, economic-based protectionism for the company and shareholders appears to be the primary, legally-enforced compliance demand for governance team members; referred to as an outsider model (Fama 1988). The European Model of governance, however, is much more considerate of stakeholders in more equal proportion to shareholders, referred to as more of an insider model and relevant in Europe and in Japan (Gilson and Roe 1993). European policies view a business as being a subject of government regulation with the objective of facilitating improved social, economic and employment policies as an outcome of controlled and responsible corporate activity. European policies view legislation as a methodology to achieve such objectives as decreasing poverty or social stratification through corporate behaviours. For instance, creating legislation that increases labour education, building labour market participation, supporting a more effective balance between work and lifestyle (Fannon 2006), and even protectionism for the environment and sustainability. European perspectives see the business as being an essential social partner that strongly contributes to macro-economic growth and more productive social improvements, therefore stakeholder rights are more strongly iterated. Europe’s Lisbon Agenda views all stakeholders as being owners of institutions and the state and EU level that assist in facilitating corporations’ contributions to a more productive and equitable European future (Europa 2008). The Anglo-American model, built on a free market value system, does not see the corporation as being a subject for government control or regulation, as aforementioned. The Anglo-American model of governance sees stakeholders as being externalised and not necessarily vital for influencing what drives core activities of a business. This model sees shareholders as being the most instrumental and influential owners of a corporation, hence requiring acknowledgement in legal protectionism and compliance methodologies of directors to ensure their vested interests are sustained. The Anglo-American model views stakeholders (such as community members) as arms-length considerations and not protected by corporate policy (unless mandated by common law precedents). There is no model which can be deemed most effective for properly and ethically guiding an organisation. Governance failures, under different models, have been illustrated in such famous scenarios as Enron and Barings Bank Tyco where senior management fraud and director irresponsibility have literally brought down an industry. In fact, the United Nations asserts in its UNECE Roundtable report on corporate governance that different models of corporate governance have their benefits and limitations which contribute to success in some states and problems in others, dependent on national, economic and corporate factors (UNECE 2005). However, when comparing the Anglo-American model with the European model, it would appear that the European governance model is more reflective of emerging corporate trends. There is a phenomenon within international consumer society, the lifeblood of many corporations, known as ethical consumption. Ethical consumption, properly defined, is the tendency of consumers to maintain more favouritism toward companies that illustrate a belief in corporate social responsibility (Bezencon and Blili 2010). A recent study by Oh and Yoon (2014) surveyed a large sampling of consumers and found that the majority of product and service buyers would maintain a much more favourable view toward companies publicising social responsibility as opposed to companies without this social focus. This same study found that consumers would be more likely to make product or service purchases from socially-oriented firms with a strong ethical stance (Oh and Yoon). This trend in ethical consumption maintains significant implications for a firm that is attempting to achieve greater revenue growth and competitive advantage over other businesses, especially in very competitive and saturated marketplaces. The European model of corporate governance puts into effect legal enforcements for companies to comply with socially-motivated objectives and stakeholder protectionism. Hence, rather than having a corporation create their own autonomous code of ethics, common in the Anglo-American model of governance, European policies and legalities ensure that businesses consider stakeholder needs and expectations as a recurring portion of corporate activity. Both the Anglo-American and European models do emphasise that the duty of the directors is to ensure corporate success and profitability, however in an environment where ethical consumption is significantly-influential in consumer consumption decision-making, it would seem the European model is more conducive and effective for ensuring corporate profitability. Grande (2007) reports on a study involving 5,000 different consumers and it was found that over 30 percent of participants would be willing to pay higher prices on products and services produced and distributed by companies with strong ethical focus and responsibility. With legal mandates under the European model demanding stakeholder protection and social considerations that drive responsible business behaviour, the European model would be more effective (theoretically) in driving corporate success and growth in revenues. Companies operating under the Anglo-American model of governance might be considerably resistant against government attempting to regulate the ethical behaviours of the firm through legal mandates due to long-standing ideologies related to free market capitalism and government non-intervention in controlling business decision-making. Consumers’ propensity for contemporary ethical consumption and the duty of directors to sustain corporate growth and success under the European model would be congruent and inter-dependent for satisfying corporate needs and enhancing shareholder benefits for those who invest in these socially-oriented firms. However, one cannot discount the Anglo-American model’s relevancy and benefits for certain economies and corporations. In China, as one example, long-standing Communist values and Communist-oriented leadership in firms emphasised considerable power distance between executives, shareholders and the stakeholder population. This slow-to-change corporate culture found difficulty achieving growth for the Chinese economy as the nation attempted to become more corporately-competitive internationally. Therefore, the Chinese government began developing corporate laws more aligned with the Anglo-American model, especially in terms of non-intervention and de-regulation, which promoted rapid growth and more autonomy in business decision-making. The shareholder-oriented legal framework for corporate conduct was adopted which emphasised that corporate leaders conduct activity, primarily, in favour of shareholder protection and wealth enhancement. This led to more incentive for shareholders to invest in Chinese firms and built a securities market valued at £1.3 trillion which had been unheard of prior to routine adoption of the Anglo-American model (Liang and Useem 2009). In the case of China, had businesses not adopted the Anglo-American ideology of corporate governance, the strong and profitable securities market that now drives shareholder wealth would not exist. It would likely be the fundamental duty of directors and executives to ensure corporate wealth, with little consideration of external actors (stakeholders) that serve to improve capital growth within a firm. Prior to adopting elements of the Anglo-American model, it was nearly impossible to determine ownership rights between the Chinese government and those who provided investment funds to a firm (Yang, Chi and Young 2011). State-owned enterprises which seriously stagnated economic growth for the nation were replaced with more liberal private owners and directors (rather than Communist Party appointed directors) that emphasised more than corporate protectionism, but shareholders as well. The Anglo-American model of governance was, apparently, relevant for China in an environment where the country could not attain global competitiveness or economic growth. However, should that necessarily discount the viability of the European governance model for other nations or the United Kingdom? Legal standards were developed throughout the European Union that ensured appropriate family-related leave to employees, adequate vacation time availability and substantial regulation of hours that employees are allowed to work. The United States, in 1994, developed the Family and Medical Leave Act in an effort to emphasise some dimension of employee stakeholder rights. However, the facilitation of this law is trivial in comparison to the EU and not available to all employees in every industry. Europeans, today, are guaranteed, legally, four weeks of vacation time annually and these mandates are enforced in European corporate law (Fannon 2007). Why is a governance model, the European Model, so relevant in better reflecting corporate trends than the Anglo-American Model? At the socio-psychological level, employees that are granted more work-life balance opportunities give employees a sense of control over their working environment, which leads to greater satisfaction and job productivity improvement (Nauert 2011). In a business environment where human capital is directly correlated with competitive advantage for a firm, creating governance mandates which emphasise stakeholder protection (rather than primarily shareholder protection) can potentially make a firm more competitive and enhance profitability. The European Model emphasises that government and society expect a duty toward employees as an obligation of corporate governance which would theoretically be beneficial for organisational productivity and potentially reduced turnover rates (costly to a firm in terms of economics and loss of skilled human capital). From a different perspective, the European model of governance promotes a dual board system, consisting of a supervisory board and a traditional board of directors. What does this imply? It suggests that the European model is more considerate of having a broader oversight system over corporate and director activities; as compared to the Anglo-American model with a unitary Board of Directors for a firm. Hence, European firms promote communitarianism. Employees in European firms, prevalent in German corporations, are granted 50 percent ownership of seats on the supervisory board (Forsythe and Notermans 1997). Unlike companies that operate with the Anglo-American model, employees have much more of a representative voice in guiding corporate decision-making under an idealised European governance model. This provides employees in companies such as Germany, and others heralding the benefits of the European corporate governance model, far more influence in how the corporation approaches extending its corporate life cycle and making decisions relevant to evolving external conditions. Why, though, would the European promotion of a dual board system be advantageous over that of the Anglo-Model with a single-tiered system? In today’s highly competitive global markets saturated with different market entrants and industry players, companies must routinely innovate in order to maintain a positive market position and avoid the decline stage of a product or service life cycle. According to Stover (2007) in order for a firm to develop recurring and creative innovations, interaction throughout the organisation is essential under an open culture system. Therefore, in a German firm, as one example, with employees having significant authority in collaborating decision-making with senior management and directors (in their supervisory board positions), it facilitates this intervention and communication required to make a firm more innovative and provide more innovative products in competitive markets. In some countries, decision-making is top-down and not participative with employees which can stifle innovation and creativity needed to make a firm competitive. The European model, promoting a communitarian set of values and practices in governance teams, would theoretically lay the foundation for improving the market position of a firm and making Board decisions most flexible and feasible for evolving external markets as compared to the Anglo-American model. Conclusion As indicated by this essay’s research, from a legal view, what is meant by corporate governance is ensuring corporate success and profitability, guaranteeing that shareholder needs and wealth is protected, and (in some instances) being considerate of the needs and expectations of external and internal shareholders. However, it should be recognised that employees as shareholders are not largely protected under the Anglo-American model and such protections are left to the autonomy of a company’s Board and crafted in a non-legally-supported code of ethics rather than through corporate law. To define corporate governance means compliance to duties, mostly financial and corporate-oriented, that ensures business and shareholder profitability as primary obligations. However, evolutions of corporate governance mandates in Europe seem to be more conducive to changing corporate trends and external market conditions from a global perspective. Through the promotion of a dually-controlled Board system (in the European model), corporate law protecting stakeholder rights (such as ensuring compliance to vacation time and work-life balance mandates), and a growing trend in ethical consumption, satisfying employee shareholders and community members of a state have tremendous advantages for a firm’s profitability opportunities and continued, sustainable growth. The Anglo-American model, which is prevalent in the United States and is being developed under this ideology in China, contribute to very strong capital and securities markets that have benefits for government revenue production, urban development, employment growth and many other society-related benefits. However, under the Anglo model, if corporate profitability were to be impacted by expenditures and activities designed to protect the stakeholder, it is likely that firms would abandon this ethical code of conduct in favour of re-attaining profitability. Therefore, from a long-term perspective, due to a changing social and consumerist culture around the globe, it should be concluded that the European model is more conducive to properly guiding a corporation. More satisfied and productive employees and more empowered employees in supervisory board seats, as promoted by the European perspective of governance, has many potential benefits for achieving firm growth and competitiveness. The European model of governance attempts to align director and executive activities in such a fashion that it creates a harmonious benefit for society, government and the corporation with an emphasis on equity and balance. 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