Abstract

In the autumn of 2008 the global banking crisis reached a resounding crescendo and the brutal climax necessitated governments right across the world taking essential emergency action to shore up the creaking global banking system which, as Bordo¹ contends was in danger of total collapse. In the UK the crisis had catastrophic results with a marked increase in the level of unemployment together with a sharp fall in house prices and allied to steeply rising government debt. A great degree of over-confidence together with an extraordinary  large helping of extreme optimism oversaw the collapse of the banking sector and brought into sharp focus the lack of observance of corporate law and governance within financial institutions.

 

However, it has to be noted that the UK banking sector wasn’t alone in financial freefall as giant oil company Beyond Petroleum along with retailer Primark and online giants Google and Amazon amongst other global corporations displayed an alarming absence of corporate governance in recent years. As  Bordo² further reports stakeholders and shareholders in all these companies were extremely startled and confused by what was occurring and there was an urgent need to examine at the highest level what had gone awry in the management of these high profile household name companies, that gave stakeholders and shareholders alike, major cause for concern.

 

ACCA³                tells us that traditionally, English law has favoured shareholder primacy, a premise that clearly indicates that directors were primarily concerned with maximising profits for the benefit of shareholders. This fundamental attribute had gained prevalence as being the central purpose of business. However once management within the huge corporate business sector, and in particular the banks, had begun to spiral out of control, it became time to reconsider the thorny matter of shareholder primacy and to examine in whose interests companies should be managed. It was also necessary to recognise that directors of companies have certain legal duties to stakeholders and shareholders and these duties should be exercised first and foremost to comply with the principles of corporate governance and more importantly within the UK, within the provisions of the Companies Act 2006 and its amendments.

 

Therefore, a critical review of shareholders versus stakeholders in corporate governance was deemed necessary to ascertain their roles and responsibilities. This dissertation will therefore present as its core subject the matter of corporate law and governance within companies and how these relate to boards of management and directors as well as how they impact upon both shareholders and stakeholders alike. This work will furthermore include an assessment of the relevant parts of Sections 170 to 181 of the Companies Act 2006 which principally concerns director’s duties. Moreover this project will summarise and evaluate the arguments pertaining to shareholder and stakeholder theory, including an assessment of the respective roles of stakeholder and shareholders in corporate governance. Also coming under the microscope will be the matter of stakeholder theory; setting out the relevance to contemporary corporate governance and company practices and their ultimate legitimacy as exemplified by the jurisprudence arising from case-law. Examples of  United Kingdom case-law will also be utilised to strengthen the arguments contained herein.

 

Contents

 

Abstract…………………………….………………………………………………………………………………2

1. Introduction…………………………………………………………………………………………………….4
2. Literary Review…………………………………………………………………………………….………….7
   • What are stakeholders and what are their responsibilities? ………………………………………………………………7
   • What are shareholders and what are their responsibilities? ………………………………………………………………9
   • Corporate governance – a matter of prudency……………………………………………………………11
   • Corporate governance – a matter of social responsibility…………………………………………………13
     • Beyond Petroleum: Deepwater Horizon Oil Spill Gulf of Mexico 2008………………………..13
     • Primark Asda Matalan. Rana Plaza Disaster Dhaka Bangladesh 2013………………………….14
     • Google…………………………………………………………………………………………….15
     • Tesco………………………………………………………………………………………………16
     • BHS……………………………………………………………………………………………….17
   • Corporate governance – A matter of getting it right………………………………………………………19
     • Case Study – IKEA………………………………………………………………………………19
     • Case Study – Walmart……………………………………………………………………………20
   • Corporate governance – Comply or Explain………………………………………………………………20
3. Assessment of Sections 170-181 of the Companies Act 2006….……………………………………………..25
4. Methodology…………………………………………………………………………………………………..27
5. Conclusions……………………………………………………………………………………………………28
6. References……………………………………………………………………………………………………..31

 

 

 

1. Introduction

The fundamental instrument of capitalism details that a company is very simply a joint business enterprise between those who own it, nominally the shareholders, and those that run the company, who are the directors⁴.   Directors are those persons made responsible for acting in the best interests of the company and therefore have to pay due deference to corporate governance and how it affects, not only shareholders, but also the stakeholders in a company. The sole purpose of corporate governance is to ensure judicious management by company directors that protects all the interests of all those concerned with the company and can ultimately ensure and lead to the long term success of a company. This is perhaps an over simplification, but nonetheless corporate governance should be the hub of management thought and direction. However, as the world has discovered in recent years, corporate governance and observation of corporate law have, in many cases, taken a back seat in the ultimate pursuit of profit and the convenient avoidance of corporate social responsibility (CSR) Initially there is a need to determine exactly what corporate governance is and the FRC (2014 p5)⁵ defines corporate governance as:

 

“Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place

The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in general meeting”

 

As can be seen above corporate governance is a fairly simple premise that should always be at the heart of any and every key decisions made at board level as it guides companies and corporations along the road of ethical standards and social responsibility. Corporate governance in the UK for listed companies is enshrined in law within the Companies Act 2006 and this legislation concerns exactly how boards of directors have to manage the affairs of companies outside of the normal day-to-day operational issues. As FSA (2014 p5)⁵ further contends good governance concerns, most importantly, the matters of transparency, accountability and sustainable success. Furthermore it is also a matter of establishing and adhering to a culture which has unique moral values and is of an ethical nature.

 

All companies are operated subject to the law of the land and it is also the vital role of directors to ensure that all company operations are conducted within a rigid legal framework with adherence to corporate law.

 

Looking at corporate governance from a separate angle Shleifer & Vishny⁶ contend that it is all about “How investors get their managers to give them back their money”. This maybe a flippant and over simplified approach, but it does encapsulate quite succinctly the essence of governance especially from a shareholder’s point of view. To put some flesh on the bones of that quote, corporate governance is in reality, the act of steering a successful path through the increasingly hazardous business minefield and it is basically the structure and the relationships which together determine company direction and performance. It is obvious therefore, that the board of directors are a crucial component of this operation. It is also critical to recognise the relationship of corporate governance to shareholders and management alike, as a totally successful governance framework also depends upon many other participants which crucially perhaps, includes observation of UK law as well as recognition of national and local government regulatory authorities. It should be noted that there is a certain purpose and legitimacy to governance which has to be utilised to ensure that corporations act within the law at all times and there are certainly many legal as well as non-legal principles involved

 

Right across the corporate landscape there are stakeholders and shareholders and as this project will show, both have a role to play in corporate governance.  They can be easily differentiated by the simple maxim that shareholders hold shares in a company whereas stakeholders have an interest in the company. To complicate this premise, it should be remembered that shareholders also have an interest in a company as they are also stakeholders because they hold a financial ‘stake’ in a company. Therefore they are both principals within the corporation. Moreover as Comindwork⁷ contends stakeholders can be sub-divided into primary and secondary stakeholders. Primary stakeholders are vital in that without their continued participation, a business would simply fail to exist. Primary stakeholders who include shareholders, top end managers, company staff, strategic clients as well as customers and strategic partners are therefore those that are influenced by or can affect the day to day operation of a corporation and these nominally also include key investors. Secondary stakeholders are principally competitors, vendors, associations, government agencies, media, banks, unions and the local community and as these are not engaged in any form of transactions with the corporation they are thereby are not considered essential to the survival of the corporation.

 

Some shareholders may only hold just a few shares, whilst other shareholders will be major players in a business and wield considerable power due to their high level of investment. Shareholders are not just individuals either as companies and corporations often hold shares in other companies as part of an investment portfolio. However no matter what the level of investment all shareholders have exactly the same responsibilities under UK law and each share represents just one vote at general meetings.

 

Stakeholders and shareholders all have a common purpose and that is to ensure the success of a company, simply because success benefits all concerned. Stakeholders together with shareholders have certain rights and privileges under UK law, but what are the principal differences between these two parties with this apparent common purpose? This research primarily seeks to bring greater clarity to the roles of stakeholder and shareholder alike, because both parties will often have competing and conflicting demands and these need to be examined in more detail. Stakeholders will have for example differing expectations because of their diverse nature Different shareholders too; will not always view their stake in companies in exactly the same way. This project highlights both the role of stakeholders, in all their various guises and also shareholders in their many shapes and forms, and examines their roles and responsibilities particularly in regard to company practice and corporate law.

 

Conflicts abound in business between stakeholders and shareholders for although they may all possess a common purpose, there are quite often different beliefs in how that common purpose may be and can be achieved. Satisfying both parties is one of the more difficult managerial roles. As Marney & Tarbert ⁸ contend the main conflict is the simplest one, the pursuit of profit. Shareholders often seek short term gains, however the needs and wants of stakeholders tend reduce or slow down growth and thus directly affect share values. This is a classic case of shareholder value perspective which will treasure profitability before responsibility May et al ⁹ A rising share price, decent dividends on investments and company profitability are paramount to the shareholder and therefore shareholders are often viewed as being self-cantered, favouring economic achievement and corporate efficiency over slow, steady growth and seeking capital gains on their original investment. Confino J¹⁰ contends that whilst shareholders seek corporate success, their view is exactly polar opposite of the stakeholder as these will oft favour responsibility before profitability. This basically entails a belief in satisfaction amongst all stakeholders which is imperative for the continued growth and success of a company. Moreover increasing common wealth across all stakeholders is considered to be morally just and proper, rather than the narrow shareholder view that almost always favours the pursuit of profit at all costs (an oft repeated shareholder value) which is often to be considered as improper by stakeholders. There has to be a legal framework in place within which companies have to operate and this has to be stringently overseen by shareholders, stakeholders, local authorities and national governments. Corporate governance is therefore paramount and is the moral and ethical duty of all parties. As will be seen, when it comes to the matter of corporate responsibility, there is a great divide between the expectations of both stakeholders and shareholders and this dissertation will therefore include as its core a critical review of shareholders versus stakeholders and their respective responsibilities and the key roles of each in corporate governance. Furthermore corporate governance or to be more precise, the lack of it, will be examined with examples of where and how huge international corporations got it wrong and also examined will be the often serious and far reaching repercussions of their actions.

 

2. Literary Review

 

• Who are stakeholders and what are their responsibilities?

The word stakeholder covers an extremely and extraordinary broad spectrum. A stakeholder in a business can be simply one person, just an individual. Also a stakeholder can be a group of individuals with a collective purpose or a company or organisation, all of whom have an interest in the business concerned. This group of people can be employees, customers, suppliers or even the local community around the area in which the company is based.

 

Taking a stake in a company is not just about possessing a financial interest in a company although this can be true and illustrates succinctly that shareholders will also be stakeholders. However, as well as shareholders, owners, directors, employees, customers, suppliers, unions along with company investors and creditors are all stakeholders to a greater or lesser degree in that they all have an interest in how the company is performing in the marketplace . The government can also be a stakeholder as we have seen in the UK in recent years with public funds being pumped into both Lloyds Bank and the Royal Bank of Scotland amongst others. House of Commons Library Briefing Paper¹¹   To some degree, especially with industrial businesses, there is an obligation to the local community and so those living near a company premises will also have a stake in the company as well as the local authorities in that area as well.

 

Each and every stakeholder, whether primary or secondary will have a different perspective on how the company performs; however they all have a common goal, which is simply the success of the company. Company owners and shareholders for example, are actively seeking a profit from company activities, whilst employees, including management seek decent salaries and working conditions and customers require a high level of service and a quality product at the right price.  Unions seek decent working conditions and fair pay and investors seek a return on their outlay whilst creditors wish to have outstanding bills paid. The local community look for job opportunities as well as a well managed site.

 

Stakeholders therefore can be both internal and external and it is fair to say that stakeholders of whatever form can affect a business and crucially perhaps, be affected by a business. They can also be affected by/affect strategy or indeed, individual projects.  Eden and Ackerman (1998 p117) ¹² contend that stakeholders are “People or small groups with the power to respond to, negotiate with and change the strategic future of the organization”. However Freeman (1984 p 46)¹³ argues that this view is too narrow and does not take into account all groups and individuals who can affect or can be affected by the achievements of the organisations objectives.

 

As for stakeholder responsibility Freeman et al (2006 p8) ¹⁴ contends that there are ten principal areas that are relevant, these are:

 

• Bringing stakeholders interests together

This is principally about managing expectations and balancing all stakeholder interests and involvement in the company and ensuring that they all react together in a positive manner to bring about positive outcomes.

• Recognising stakeholders as real and complex people

Most human beings are complex and so it is important not to make any rash assumptions about stakeholders as individuals or as groups. Employees, for example are far more likely to invest their time, energy and creativity in a company when they believe that they are being recognised for their individual input.

• Seeking solutions that satisfy all parties

Companies experience many problems which present themselves in different forms. It is the management’s responsibility to perform a delicate balancing act and ensure that solutions to these problems satisfy multiple stakeholders. This is the core of corporate governance.

• Engaging in dialogue with all interested parties

In the 21^st Century there are many more means of communication then there were previously and therefore it is essential for management to maintain regular dialogue with all stakeholders through whatever method is best suited. It is a matter of corporate transparency.

• Managing stakeholder relationships from within

A situation that relies upon government or court intervention to settle a stakeholder issue is far from ideal.  This is tantamount to corporate failure to manage and has to be addressed. Therefore it is imperative that relationships are nurtured and reviewed regularly.

• Proactively assessing stakeholder’s needs

The requirement to remain ever proactive is another way of positively over investing in stakeholders needs. It’s a matter of keeping ahead of the game to develop a better understanding of stakeholders’ requirements.

• Preventing a trade off of stakeholders against one another

It is imperative not to use a stakeholder’s interest to make a trade off for the sake of the company against another stakeholder. This will result in resentment at the very least. Better to be upfront and communicate with all parties and attempt a resolution through open debate.

• Utilising strategic thinking in stakeholder negotiations

It is essential for companies to strive to constantly improve stakeholder relationships and to treat primary and secondary stakeholders with even handedness in any negotiations.

• Monitoring processes to better serve stakeholders

Nobody gets it right all of the time, however efficient monitoring of systems and processes can only go to achieve better business practice and improved customer service.

• Acting with purpose to fulfil commitments to stakeholders

No company can fulfil their purpose to generate profits without due deference to stakeholders from all quarters.

 

Paying close attention to all the ten of the points above is the antithesis of prudent management. It underlines a commitment by directors to stakeholders and recognises their stake in the company as being an essential component to success. Table 1 below underlines the role of stakeholders in a more graphic form.

Table 1. Stakeholders and their positions in the business structure.

Source: BBC GCSE Bitesize¹⁵

 

It can be seen in Table 1. above that the business structure has six main arms of support for stakeholders. It is a fact that the actual involvement in the business for each stakeholder will vary, however businesses must recognise that each stakeholder is as important as the next and that each one must be treated at all times with the same equity.

 

• Who are shareholders and what are their responsibilities?

A shareholder is a risk taker in essence, as investing capital in companies carries a degree of risk, which depending upon the company invested in; it can be a minimal degree risk or can prove to be a more precarious risk. Shareholding is therefore a gamble and like in all forms of gambling there are so called ‘safe bets’ like gilt edged stocks or the more ‘devil may care’ gambles which are often down to informed guesses or hunches.

 

The very existence of a company is dependent upon shareholder involvement and investment, because they hold a crucial financial stake in a company. These shareholders also have certain rights under the law, as they are at least partial owners of a company. Shareholders can be individuals, groups of individuals or companies or corporations. As investors in a business they not only have rights which are enshrined in UK law, but also certain responsibilities that they must adhere to. A shareholder in a limited company will for example, be protected from any liabilities that the company incurs Shareholders may have a close involvement with a company in that they can be directors of a company and therefore have close involvement in everyday decisions of the company. It should be noted as Reference for Business ¹⁶ contends that directors’ roles are those of stewardship of a company in that they are charged with the day to day running of a business and are therefore the decision makers, whereas shareholders have certain roles or duties which ensure that they have a significant input into who controls the company concerned. Shareholders can, and most often are, only involved in a company as far as possessing a financial interest. Their interest may not actually go beyond a cursory glance at the share option price occasionally. The differences between directors and shareholders are manifold and the main points of difference are detailed in Table 2 below:

 

Table 2: The difference between directors and shareholders

Directors  (or Officers)	Shareholders  (or Members)
A director can also be a shareholder	A shareholder can also be a director
Can be a person or a corporate body	Can be a person or a corporate body
Responsible for the day to day running of a business in accordance with the Companies Act 2006	Not responsible for the day to day running of a business unless they are also directors
Have an expectation to promote the business for the benefit of the company and its shareholders	Have certain rights that include approving a change in company name, appointing auditors, altering directors’ powers and changing the Articles of Association etc. Shareholders also hold certain voting rights at General Meetings
Receive a salary, bonus or dividends as applicable	Own a portion of the company and receive share dividends depending upon the number, value and class of share
Appointed to directorship at the discretion of shareholders and can be removed if they prove to be incompetent, unfit for duty or in breach of their contract	Have certain powers to appoint and remove directors at any time
Rights and powers are determined by shareholders	Have the right to determine directors’ powers
Directors can be held liable and also face prosecution if they do not uphold legal requirements	Liability is limited to the nominal value of any shares

 

Source: Mantysaari P Comparative Corporate Governance¹⁷

 

Whilst there are significant differences in directors and shareholders it should also be noted that there are certain areas where their rights and responsibilities are very much alike and these can be seen in more detail in Table 2 above.  It is interesting therefore to note that directors and shareholders can be one and the same, however as ACCA¹⁸  contends under UK law both directors and shareholders are treated as separate entities even though they stand to benefit in both capacities through the success of the company concerned. When directors are also shareholders it is important that they divide their responsibilities between the two roles and act accordingly.  Having established both the parallels and the differences between directors and shareholders it is imperative to establish exactly where they both fit regarding the matter of corporate governance. This is covered in more detail in 2.3 below.

 

Space does not permit a long and detailed study of Memorandum and Articles of Association of Companies, however it is imperative to realise that such documents are legal instruments under UK Law that detail the duties of directors and shareholders alike and lay out the rules by which a company is run. They are an important procedure in the setting up of a company for as Gov.UK¹⁹ contends Articles along with a Memorandum of Association are required initially to register a company.

 

• Corporate Governance – A matter of prudency

The increasing globalisation of capital markets, the number of issues involving corporate scandals and the increasing influence of the rapidly developing third world economies has increased demands for prudent and proactive corporate governance in order to limit complexity and to foster international corporate relationships. ICAEW ²⁰

 

Seemingly it is an impossibility to standardize corporate governance guidelines across the world, however with the rapidly increasing international inter-relations of companies operating in the global marketplace, it is necessary for companies doing business across international boundaries to ensure that each adheres to a general corporate governance framework that can be agreed upon. This not only does this premise make for common sense, but is also essential to protect shareholders and stakeholders alike, wherever they may be. A great example of this is the European Union, which has any number of policies relating to corporate governance to which corporations operating within the 28 nations within the Union should adhere^. Europa.eu ²¹  contends, thee purpose of EU rules in this area is to:

• enable a businesses or corporation to be set up anywhere in the EU
• provide protection for shareholders and other parties with a particular interest in companies
• make business more efficient and competitive
• encourage businesses based in different EU countries to cooperate with each other

In 2011 the European Union Commission published a Green Paper ²² in which the word  ‘trust’ was used frequently. It also mentions sustainable growth and the building of a stronger international financial system under the EU umbrella. Appropriately perhaps, the Green Paper covers at some length the need for prudency in management and the improved monitoring of corporate governance.

 

Of course prudent and improved management begins in the boardroom of each and every company and as ICAEW²³ contend that prudent and effective management delivers long term success and that it is the role of directors to bear the responsibility of ensuring that corporate governance guidelines are adhered to. Therefore it is necessary to examine the framework in which corporate governance operates and recognise that this structure is not entirely static and will alter from country to country, let alone from company to company, as there are many imponderables that are not common right across the board.  However as the Business Directory²⁴ contends a corporate governance framework, irrespective of country or company, consists of three particular areas of interest:

 

1)  The realisation that explicit as well as implicit contracts exist between the company and its stakeholders and these are necessary for the fair distribution of responsibilities and rights as well as any rewards that may accrue,

2) Necessary procedures have to be put in place to reconcile the often conflicting interests of stakeholders and shareholders in accordance with their duties, privileges, and roles,

3) A foolproof system of checks has to ensure that proper procedures for supervision, control, and the flow of information are utilised at all times.

 

All of the above recognise the need for prudent and sensible management by company directors who are responsible for the stewardship of a business. Basically corporate responsibility is about what the board of directors do and how they do it and who they do it with and to whom. It is not about the day to day running of the company.

 

The Combined Code on Corporate Governance states very simply that “every company should be headed by an effective board, which is collectively responsible for the success of the company” UK Corporate Governance Code (FRC 2012) ²⁵. Therefore it is necessary to examine the roles of both the board of directors and executives. The Companies Act 2006 details seven duties to which directors should adhere and these are highlighted in Table 3. below:

 

Table 3: Duties of Directors

1	Duty to act within powers
2	Duty to promote the success of the company
3	Duty to exercise independent judgment
4	Duty to exercise reasonable care, skill and diligence
5	Duty to avoid conflicts of interest
6	Duty not to accept benefits from third parties
7	Duty to declare interest in proposed transaction or arrangement

Source: Companies Act 2006²⁶

Examining the duties of directors in close up reveals that whilst having an implicit duty to promote the success of the company there is a clause within the Companies Act 2006 which obliges directors to pay attention to: “the likely consequences of any decision in the long term^{’ 27}

 

 

 

 

• Corporate Governance – A matter of social responsibility

The public image of a corporation will pretty much accurately reflect the inner culture of that company. Therefore it follows that what is embedded deep within a corporation will shine through. This is of course, a double edged sword with both good and bad angles to it.  In recent years the UK Banking crisis only brought home to the population the very stark realisation that lack of corporate governance was not a matter of small and isolated incidents, but a huge problem across the world and furthermore within any number of industries. This was highlighted, not only by poorly managed banks, but by a number of high profile issues involving well known multinational corporations that quite rightly received global media coverage. Sketched out below for illustration purposes are just some of those cases that highlight an alarming lack of observation of corporate law, atrocious corporate governance, and a serious neglect of corporate social responsibility

 

2.4.1    Beyond Petroleum:  Deepwater Horizon Oil Spill Gulf of Mexico 2008

The Deepwater Horizon spill was an unprecedented disaster representing not just a lack of corporate governance on the part of Beyond Petroleum (BP), but also an alarming failure of the observation of environmental law and therefore the spill brought into sharp focus the function of those government departments charged with overseeing deepwater drilling; Moreover the spill asked fundamental questions of how corporations are governed and how they should be governed.

 

The Deepwater Horizon oil spill in the Gulf of Mexico in April 2010 killed 11 people and injured another 17 and also did untold damage to the ecosystem in the Mississippi Delta by dumping 205 million gallons of crude oil into the sea.. Mcmasters BP Deepwater Horizon Crisis²⁸ reports that BP, despite the profile of the company and the nature of its business, displayed a complete absence of corporate governance by not having any effective crisis management system in place and it seems that the company was in fact guilty of just making up the solution as it went along.

 

Palast²⁹  contends that the Deepwater episode was not the first time that BP had experienced a serious ‘blow out’ where an unsatisfactory and dangerous solution of applying quick drying cement was used to plug the spill. Two years before the catastrophic Deepwater incident BP suffered a copy-cat spill on a rig in the Caspian Sea. On that occasion BP got off lightly as all 212 employees on board the rig were evacuated safely and the spill was contained within a short time.

 

The US Presidential Commission ³⁰ investigating the Deepwater oil spill, compared the spill to the Columbia space shuttle disaster which noted that: “Complex systems fail in complex ways” and so it was with Deepwater, The Commission also reported that the botched clean-up operation also displayed to the world how BP had got so many things wrong and continued to get them wrong even months after the spill. Furthermore the Commission was critical of the US reliance of private industry to supply the nation’s energy Commission chairman Bob Graham said: “This basic trait of our private-enterprise system has major implications for how the U.S. government oversees and regulates offshore drilling”. However in conclusion the Commission decided that BP corporate governance was extremely poor and that the result of cutting costs had led to a ‘systematic failure to manage the oil well effectively”.

 

Beyond Petroleum is still suffering from the aftermath six years later with Deepwater Horizon liabilities mounting and as The Guardian³¹  reports 7,000 jobs being axed along with almost £6bn wiped off of share values in the company. Severe shortcomings in the management of the safety of workers (stakeholders too) meant that BP had to pay $19bn in compensation so far with the potential for billions more still to be paid Huddlestone Jr ³²

 

Such was the drama of the Deepwater spill that Hollywood has become involved in a dramatisation of events and as IMDB³³ reports the film starring Kurt Russell and Mark Wahlberg will be released in September 2016.

2.4.2    Primark, Asda, Matalan: Rana Plaza Disaster, Dhaka, Bangladesh 2013

The collapse of the Rana Plaza building in Dhaka, Bangladesh during April 2013 unfortunately saw 1,130 people killed and another 2,500 injured, many severely. The factories at Rana Plaza made clothing for several EU based companies including Primark, Asda and Matalan. reports AP Dhaka³⁴. AP Dhaka further reports that the collapse came about due to the management of Rana Plaza erecting two additional floors on the existing five storey building without planning permission and opening up those floors to augment existing factory space and increase production quite significantly. The building, which was already in a poor condition, could not withstand the immense weight of the additional two floors and the inevitable collapse only went to highlight the conditions in other factories utilised by EU companies in Bangladesh.

 

As The Economist ³⁵ reports Bangladesh is the world’s second largest exporter of garments following China and the trade is vital to the national economy. However this disaster brought into focus an absence of any kind of corporate social responsibility by anyone involved with the building. Corporate culpability was something that was ignored in the pursuit of profit: The list of those responsible for this terrible disaster makes interesting reading (See Table 4 below). All those listed below ignored corporate governance as an entity, for which 1,130 people paid with their lives.

 

Table 4  List of those culpable in Rana Plaza Disaster

·         Sohel Rana owner of Rana Plaza and responsible for illegally adding extra floors to the building and threatening to fire people if they didn’t work in the building.

·         Bangladesh Government made only rudimentary attempts to legally enforce national and local building regulations.

·         Local Police who had been informed of the poor state of the building and did not investigate

·         Dhaka Local Regulatory Authority was responsible for not maintaining acceptable standards

·         Primark, Asda, Matalan & others guilty of exploitation of low paid workers and an absolute indifference to safety standards.

Source: The Economist 4^th May 2013

 

All of the above were to greater or lesser extents stakeholders in Rana Plaza and therefore had a vested interest in not only the condition of the actual building, but also the working conditions of those employed to make clothing for EU markets. There were extensive profits to be made as The Economist ³⁶ Bangladesh factory owners are forced to pay low wages to undercut the rapidly expanding Chinese market and thus attract more business. This, of course was attractive to the likes of Primark, Asda and Matalan who could therefore realise a greater profit on sales. These companies tend to rely on their consumers to ignore conditions in clothing factories in Third World countries and hence they see this as tacit agreement to ignore any form of corporate social responsibility.

 

2.4.3    Google

HM Government’s Public Accounts Committee published a damning report on Google’s tax avoidance in June 2013 www.parliament.uk³⁷ Chair of the committee the Rt Hon Margaret Hodge MP said:

“Google generates enormous profits in the UK. But despite an $18 billion turnover between 2006 and 2011 it paid the equivalent of just $16 million in taxes to the UK government…..”

In its defence Google argued that its entire sales in the UK were generated in Ireland and therefore were not liable to UK taxation. However the committee found this argument profoundly unconvincing and this was supported by former UK ex-employees of Google who informed the committee that Google’s UK offices also handled a large amount of sales. Google exacerbated the issue by employing huge accountancy firms to help them disguise true sales figures and ‘massage’ tax returns. As www.parliament.uk³⁸ further reported that having generated US $18 Billion in revenue between 2006 and 2011 Google contributed just US $16 million in corporation tax in the UK, which was just a fraction of the amount that should have been paid to the HMRC. What was more damning was that any considerations of corporate governance were deeply flawed and whilst shareholders and also other stakeholders will have no doubt profited from Google’s actions, ultimately Google’s flagrant tax avoidance could have disastrous effects upon certain stakeholders as the company considers its future in the UK.

 

Google, of course, wasn’t alone in being the only multinational company to avoid corporation tax, but they were a very high profile test case and the end result of being forced to pay a miserly US $130 million in unpaid taxes by HMRC appeared to a great     many onlookers to be completely unsatisfactory.

 

Stone³⁹ reports that a new deal currently being set up between the European Union and the United States through TTIP (Transatlantic Trade and Investment Partnership) could assist companies such as Google as it is fully expected to include clauses that would permit multinational companies to seek action to effectively ‘sue’ sovereign governments for damaging their business. Stone⁴⁰ further reports that 24 countries including India, Mexico and Uganda had already been challenged in a court of law through TTIP over their tax policies concerning multinational corporations..

 

2.4.4    Tesco

Britain’s biggest supermarket chain, Tesco, has been feeling the pinch in recent years, not only from its main rivals Asda, Morrisons and Sainsburys, but also from the likes of Aldi and Lidl, the German owned cost cutting retailers. Tesco had struggled to keep apace of the rapid market changes that had occurred and so drastic measures seemed to the Board to be the answer. However the admission in 2015 that the company had grossly overstated its profits to the tune of £263m certainly raised a number of questions regarding the corporate governance of the company and questioned the suitability of the board of directors. Willmott H⁴¹

 

Unsurprisingly perhaps the company’s share price plummeted by over 11% and £2.2bn was immediately shaved off Tesco’s valuation. BBC Business ⁴² As such, shareholders and stakeholders were both affected by, what appeared to be a severe and potentially devastating miscalculation at boardroom level. The Financial Reporting Council ⁴³     stated that it would examine individual executives at Tesco as well as looking into the affairs of PwC, Tesco’s auditors. Furthermore, the Serious Fraud Office launched a formal criminal enquiry into accounting practices. That police enquiry prompted the suspension of eight Tesco executives pending potential criminal charges regarding ‘creative’ accounting practices. The Guardian ⁴⁴ The company’s problems did not end there as Sheffield contends  Sheffield H ⁴⁵ as a group of Tesco shareholders announced in October 2015 that they would be vigorously pursuing a ‘loss of profits’ claim through the courts. The ramifications of such a public case for the Tesco board are horrendous.

 

Tesco’s already considerable woes increased significantly when as Butler⁴⁶  reported  a US litigation firm announced legal action would be pursued on behalf of institutional shareholders, claiming that Tesco directors had caused a significant destruction of long term shareholder value.

 

As Butler ⁴⁷ further reports Tesco found themselves investigated by the Serious Fraud Office and Financial Reporting Council and the grocery industry watchdog, the Groceries Code Adjudicator announced that it would be examining the food giant’s relationships with suppliers. It can clearly be seen from what has been published so far that Tesco attempted to paint a rosy picture of the state of the company and hope that no one noticed. This was both foolish and naïve.

 

2.4.5    BHS

Finally it is worth commenting on the latest in the many sagas regarding the lack of corporate social responsibility and it is one of the oldest institutions on the |UK high street, British Home Stores that is the latest major corporation to come under the corporate governance spotlight. BHS has been a troubled retailer for a number of years in a fiercely competitive marketplace where fashions are dictated by the seasons and it has often seemed out of step with its main rivals on the High Street where it has been a fixture for 88 reports that 11,000 jobs were put at risk when BHS went into administration at the end of April 2016 with an annual loss in 2013 topping £70m. Chu further reports that there is a £571m hole in the pension fund and this means that the current value of the schemes predicted liabilities, which are future pension payments, far exceed the present value of all the company’s financial assets. Furthermore, Ralph ⁴⁹ reports that the tidal wave of harm from the collapse of BHS has seen two clothing companies, Courtaulds and CUK clothing having to go into administration. More may follow it seems in the wake of this collapse.

Ralph further reports that the saga of the collapse of BHS is not a ‘five minute wonder’, but has been on the cards for some time. Sir Philip Green, whose retail empire encompasses Top Shop and Miss Selfridge, sold the BHS chain for a nominal £1 to former racing driver, Dominic Chappell, head of Retail Acquisitions in 2015 and it is since that point that the decline of BHS, already in evidence under Green’s management, nosedived to the eventual collapse this year. The ramifications of the collapse of the BHS empire rumble on at time of writing, with a government investigation at which both Green and Chappell gave evidence.

This saga will run and run with Ruddick⁵⁰ reporting that Chappell scuppered a rescue plan from Sports Direct with unreasonable demands for continuing profits after a proposed sale to Sports Direct.

 

The BHS case was highlighted in particular by Ian Wright, Chairman of the House of Commons Business Select Committee⁵¹ who said that in the case of BHS “effective corporate governance was almost entirely absent”. Lord Myners, who was advising the MPs conducting the enquiry into the BHS affair, concluded that: “There are clearly issues here of potential fraudulent preference, of creditor preference and of misappropriation of corporate assets under the direction of the directors of the company.”

 

It can be seen from the five examples utilised here that companies act and react in different ways to the ever changing and ever challenging demands of big business. All five examples here though displayed an inherent greed that transcends the law, CG and CSR guidelines as well paying lip service to shareholders and stakeholders alike.  In the two most extreme cases above, those of BP Deepwater Horizon and the Rana Plaza disasters, stakeholder lives were lost and although nobody died from the heinous actions of Google, BHS and Tesco, their actions were nonetheless just as thoughtless and they paid scant regard to anyone and in particular the employees of the companies. Many people found themselves out of a job because CSR was non -existent and the pursuit of profit was all.  It can also be seen from these examples that corporate failure can be yet another feature of poor CG and ignoring CSR. Ask the 11,000 people who lost their jobs in the collapse of BHS about this?

 

 2.5  Corporate Governance – A matter of getting it right.

It is for certain that in life, none of us get things right all the time and quite often it won’t matter that much as not that many of us are in charge of multinational companies.. However in the realms of big business, getting it right depends upon the collective decisions of the board of directors and ill judged and poorly thought out decisions can have catastrophic results even if they only get things marginally wrong.  Such poor decision making as seen in Section 2.4 above can adversely affect the stock values of a company or have an adverse affect upon its employees, its customers, its suppliers; the list of those that could be affected is endless and includes many more large corporations that I do not have the space to touch upon here. This is why careful consideration at board level is always required because getting it right is imperative.  Making the right decisions is a matter of prudent corporate governance allied with a collective social responsibility and sometimes, and probably more than often, a giant helping of common sense as well.  To illustrate this point it is worth examining two examples at opposite ends of the scale. One is a large European corporation that got their corporate governance completely spot on when expanding their business into a global marketplace, and the other, a massive US global conglomerate that obviously didn’t do their homework when attempting to expand into the European market and were therefore both shareholders and stakeholders were adversely affected by the decisions of the board.

 

The case study in Section 2.5.1 below tells the story of how IKEA observed CG principles and began the successful globalisation of their furniture business:

 

2.5.1 Case Study:  IKEA

IKEA has always been a name synonymous with Sweden and known in the UK for its huge warehouse-like stores. According to Pressat.co.uk (2014)⁵² IKEA is the world’s largest furniture retailer and has 298 global outlets in 26 countries, visited by 690m people every year. The first IKEA UK outlet opened in Warrington in 1987⁵³ and the company now employs 7,200 people across the UK and Ireland.  Wallop (2012)⁵⁴ contends that originally IKEA had intended setting up store near London, but inducements to be part of a regeneration project by Runcorn Council was favoured by the furniture giant and it then reconsidered its plans.

To present an idea of the impact that IKEA has had upon the UK Wallop (2012)⁵⁵ further contends that 12.8 million mattresses have been bought from the company in the UK since 1987. This would indicate that the British public have taken IKEA’s invasion of Britain lying down! However IKEA has had a very carefully constructed plan of expansion and has crept into the UK rather than marched in like McDonalds or Starbucks and the company still only has 19 outlets in Britain⁵⁶.  This is partly due to difficulties with out-of-town planning applications as much as a carefully coordinated plan of expansion which displays an intimate knowledge of corporate governance and an observation of CSR⁵⁷

IKEA remains an iconic brand and a shining example of a type of sympathetic globalisation that observes all corporate social responsibility and gives corporate governance due and proper respect.

 

On the other side of the coin is Wal-Mart, the world’s largest retailer and Section 2.5.2 below details how plans went awry for the corporation due to lack of planning and poor corporate governance.

2.5.2 Case Study: Wal-Mart

According to Brunn (2006 p28) ⁵⁸ in 2005 global sales of Wal-Mart, topped $285bn with the company employing over 1 1/4m employees worldwide in over 5,000 stores. As Wal-Mart steadily headed towards global domination of the retail world there were real concerns about its creeping globalisation of the retail sector. However in its attempt to reach a wider global audience Wal-Mart directors experienced a number of issues which adversely affected the corporation and quite frankly, made at least some directors look like idiots!

Despite its domination of the retail sector in the US and Canada Wal-Mart experienced many issues when attempting to expand into Germany in the 1990s. Whereas Wal-Mart could call upon a reliable and low cost supply route in the US, Rugman (2005 p 28)⁵⁹ cites that their lack of ability to do so in Germany was due to importation duty and the distance that goods had to travel. This meant that Wal-Mart was uncompetitive on prices compared to German or European companies who could take advantage of local sourcing and also a relaxation of trading regulations only applicable to companies from member countries within the EEC. Wal-Mart executives also had little idea of the European taxation system. Furthermore Wal-Mart executives also came up against a serious cultural barrier that of language, as none of them spoke German and so communication was a major issue.. Wounded by their first foray into Europe, Wal-Mart executives quickly learnt that you can’t just muscle in on an existing market without first doing a little groundwork and this was exemplified by their takeover of the ASDA chain of supermarkets in the UK in 1999, which as this was an existing retailer in the Wal-Mart mode, the Wal-Mart Board did not repeat the mistakes they had earlier made in Germany. Since the takeover of ASDA Wal-Mart has steadily increased its share of the UK supermarket business and in 2014 Wal-Mart had 577 retail units across the UK (Walmart.com 2014), making it Britain’s second largest supermarket business.

It can be seen by the examples above that an observance of corporate governance principles is important if companies and corporations want to expand their businesses into foreign markets. This, of course, is only one area where this is an imperative, however the examples above aptly illustrate the importance of getting it right and getting it right in the end benefits both shareholders and stakeholders.

• Corporate Governance – Comply or Explain

Right across the European Union corporate governance codes are applied on a comply or explain basis.  The Financial Times Lexicon⁶⁰ defines comply or explain as a best practice standard of the UIK Corporate Governance Code which recognises the quality of leadership of a board of directors, their accountability, effectiveness of business practice, investor relations and also the remuneration process.  Although the code makes due reference to statutory regulations it has no legal powers, however it does require companies to comply with the code or to explain why they have not done so.  An explanation may be acceptable as to why a company has not complied in certain extenuating circumstances however as the FT Lexicon⁶¹   confirms, it will be necessary for a board to discuss with shareholders the reasons for their non-compliance.

 

So, under what conditions would comply or explain be appropriate?  The Cadbury Code of 1992 was the first shot across the bows of companies in that it was the forerunner of the UK Corporate Governance Code in regards to the comply or explain approach. This was a ground breaking approach at the time and has been copied by many other countries across the world. This approach is now the ‘trademark of corporate governance in the UK” and the European Union Statutory Audit Directive of 2006 requires all EU members to adopt a Comply or Explain approach for listed companies.

 

Comply or Explain is an approach that covers the content of the UK Code of Practice. The Code contains over 50 provisions which in turn  set out over 110 instances of what companies, boards, directors and others ‘should’ do, however as yet there is no ‘set in stone’ legal requirement for companies to comply with these provisions and they can decide not to do so provided they give an non-compliance explanation

 

Seidl et al (2009 p3)⁶² contends that provisions applied on a Comply or Explain basis are the core features of existing UK corporate governance. A simple illustration of the Code concern the roles of the chairman and chief executive of a company, which should not be one and the same individual; Furthermore, other examples within the Code lay down that the board of directors should appoint a senior independent director and the make-up of at least half the board, excluding the chairman, should comprise independent non-executive directors. The services of professional advisors and the election of a company secretary are also key and vital provisions within the Code. It can be witnessed therefore that Comply or Explain is not simply about having no requirements, but it is an approach that positively recognises that an alternative to a provision can be entirely justified if it goes on to achieve solid governance and crucially, companies are also prepared to be transparent. Interestingly, any departures from Code provisions are not assumed necessarily to be breaches to the Code as any explanation for the breach should provide an insight into how companies are considering improving their corporate governance and social responsibility. Moreover, Comply or Explain is never used in extremis, but always considered along with other approaches. It coexists alongside Code principles that need to be applied in all circumstances. Existing company law also contains requirements which cover the various aspects of corporate governance.

 

The UK Corporate Governance Code⁶³ contains five overriding principles although it should be noted it is not a rigid set of rules. The principles are:

• Leadership
• Effectiveness
• Accountability
• Remuneration
• Relationships with Shareholders

These principles also underpin other corporate governance codes and form the core of the Code.. Most components of all existing codes therefore bear relation to one or more of the above principles. However it should be noted that some principles may go beyond the current scope of codes.

 

It is a simple premise that all corporate governance codes, whether or not they use Comply or Explain, exist solely to promote good corporate governance. It must be noted that the same is true for all corporate governance legislation and regulation. That is the reason why it is insufficient for those proponents supporting Comply or Explain to argue that the benefits of Comply or Explain are solely its promotion of good governance. Companies and their shareholders have a duty to ensure that Comply or Explain remains an effective alternative to a rigid set of rules

 

The FRC^{64 `} contends that Comply and Explain is widely admired and has been copied internationally. This is because this system has inherent and specific advantages over alternatives that require straightforward compliance and a rigidity that doesn’t suit everyone. Comply or Explain has an elasticity which in itself enables innovation, because the Code is able to accommodate new ideas. Moreover it allows companies to introduce and trial new ideas at a realistic pace and to learn from the experiences of others. However some companies may be unconvinced that new ideas will make a marked improvement to governance and therefore will not comply. Such companies have less cause to argue their point against the introduction of a code if they can present a coherent explanation as to why they are not complying.

 

It is imperative that any requirements imposed are not an excessive burden and ultimately prove to be extremely costly as can be the case, especially for smaller businesses. If there is a high cost of implementing requirements there is a case for arguing that such cost could, and almost certainly will   outweigh any benefits accrued. It can be seen therefore that there is no universal solution, as clearly what may suit a large corporation may not in turn be a perfect fit for a much smaller company and widespread non-compliance may result.

 

Companies following compliance with the new provisions will only do so if they have the belief that by doing so a real difference will accrue and moreover better governance will follow.  The reason for this is that Comply or Explain presents companies with the choice of complying or not.  This means that it is not just a simple matter of putting a tick in a box, but rather it encourages companies to take a more profound look at the provisions and examine their purpose. Education is also an important aspect of comply or explain as thinking through both the purposes and also the principles of corporate governance assists companies to consider adopting principles as their own business norms. After all, it has to be remembered that this is particularly important in a complex area such as corporate governance. Making changes in corporate governance through procedures is a structured approach, however it lacks a vital human element and as FRC (2013)⁶⁵ contends CG is ultimately more effective when companies act of their own free will.

 

Things are changing though, and the capital markets are somewhat different from what they were just a few short years ago. The Haygroup⁶⁶ report that there is pressure today to somewhat harmonise diverse practices into the realm of corporate governance. Hence the world has witnessed a sea change which has been ushered in by the increasing importance of non-equity financial instruments; a brand new breed of equity owners; and also changes in the number and variety services of offered and furthermore the gradual rise in the role of intermediaries.

 

Moreover the public have become more aware of the world of corporate finance in recent years, a world which had previously been cloaked in secrecy. This has been down to the increasing numbers of high profile businesses failing in their corporate social responsibility and this has meant a number of stark and often brutal headlines in the tabloids and broadsheets alike which have brought home to the public the fact that companies cannot always be trusted to run their businesses in an ethical and moral way. Examples of this are the state having to bail out failing financial institutions such as Northern Rock and RBS and talk of a further bailout for Tata Steel^67.  Also, the alarming lack of racial and sexual diversity on boards of directors and surprise and alarm at the exorbitant amounts being paid in executive remuneration and corporate bonuses are other examples which have received bad press.

 

The public outcry has had a positive effect though and combined with some much needed updates to the UK Corporate Governance and Stewardship Codes the FRC report⁶⁸ that many companies are responding in a positive manner to the changes that they themselves introduced in October 2012.  The way these vital changes were applied meant that companies were only required to file a report during 2014 on how they had applied the 2012 version of the Corporate Governance Code, however it was seen that many companies decided to go much further and disclose boardroom diversity policies and interestingly, there was also an upswing of audit tendering which increased substantially.

 

The FRC further report⁶⁹ that they have anecdotal evidence that many companies are changing the way in which their annual reports are presented, following the adoption of new FRC reporting recommendations on the activities of the audit committee which is aimed to ensure that financial  reports and accounts are presented in a fair and balanced manner and are above all, understandable to anyone caring to examine them. This, of course, has not always been the case and hence it has been a way in which companies could potentially hide financial issues.  However good intent is being displayed and in the introduction to the FRC Annual Report 2013 Baroness Hogg, FRC Chairman said:  “Companies and investors need to demonstrate that there is substance behind their statements of good intent. While both have made progress in this regard, there is clearly more still to do. Notwithstanding the high levels of compliance with the UK Corporate Governance Code, the variable quality of explanations remains its Achilles heel. While companies are getting better at describing their actual governance arrangements, many still struggle to articulate clearly why they have chosen to deviate from the Code and we would recommend that companies refer to FRC Guidance released on this Investors, meanwhile, need to aspire to the same level of transparency as they themselves expect of the companies in which they invest. Many statements on the Stewardship Code give little insight into investors’ actual practices”⁷⁰

 

In Table 5 below are illustrated the Corporate Governance Code and other key findings and also the Stewardship Code plus key findings:

Table 5 Corporate Governance Code and Stewardship Code

Corporate Governance Code
1	There are high levels of compliance with the new recommendations added to the UK Corporate Governance Code in 2010, including almost universal adoption of annual director elections among FTSE 350 companies.
2	There have been many good examples of reporting by mid and small-cap companies, but in general their reporting is less informative than that produced by larger companies.
3	Companies should focus on board succession planning which is often highlighted as requiring attention during external effectiveness reviews. The FRC will undertake a project in 2014 to identify good practice to assist companies in meeting the Code principles on succession planning.
Stewardship Code
2	There are signs of  growing demand from owners for their investment managers to apply a stewardship approach – more mandates and Requests for Proposals now refer to stewardship, and owners are reportedly more demanding with the quality of information they receive from their managers – but there remain many real and perceived barriers to effective stewardship.
1	The Stewardship Code now has nearly 300 signatories, of whom around two-thirds are asset managers. Between them, current signatories own or manage a significant proportion of UK listed equities and have the potential to become the critical mass of investors needed to oversee and engage with companies with the aim of achieving a sustainable return to savers.
3	The quality of reporting by Stewardship Code signatories remains variable. Nearly half of the signatories to the Code have not yet updated their public statements over a year after a revised edition of the Code took effect in October 2012. The FRC is considering mechanisms for ensuring that statements are complete and up to date, and possible sanctions if they are not.

Source: FRC Annual Report 2013⁷¹

3.0Assessment of Sections 171 to 178 of the Companies Act 2006

The Companies Act 2006 ⁷² instituted a legislative declaration of directors’ duties that, supplanted much of the existing case-law and fiduciary duties placed on directors. Most notably, s.172 of the Act substituted the old duty to act “in good faith in the best interests of the company” with an obligation to act in a way, the director believes will, in good faith, “promote the success of the company” for the benefit of the members.  Section.172 has engendered significant debate, with some academics positing that, the rather loose wording of the section has created more uncertainty rather than its aim, which was, of course to reduce uncertainty.  Nevertheless, it is given that a general understanding of success in this perspective, is that, it usually means “long-term increase in value[1]” .

 

Whilst any Act can be criticised for content errors it should be noted that in general Sections 171to 178 of the Companies Act 2006 do a worthwhile job in attempting to legislate exactly what directors can and can’t do in carrying out their duties.  These ultra important sections of this Act encapsulate the roles and responsibilities of directors under UK Law and include the following provisions sketched out in Table 6 below:

 

Table 6  Directors Duties under the Companies Acts 2006

• Duty to act within powers
• Duty to promote the success of a company
• Duty to exercise independent judgement
• Duty to exercise reasonable care, skill and diligence
• Duty to avoid conflicts of interest
• Duty not to accept benefits from third parties
• Duty to declare interest in proposed transaction or arrangement

Source: The Companies Act 2006⁷³

 

As Kirkpatrick ⁷⁴ contends the ideas behind Sections 171 to 178 are to effectively eliminate weak governance, which has been recognised as being one of the principal reasons behind the financial crisis and this is a view readily supported by the UK’s Treasury Select Committee⁷⁵ when it stated that it had recognised : “important corporate governance failures in the banking sector”. Kirkpatrick further recognised that firm governance was essential to ensure that future major government bailouts can be avoided. Therefore the duties of directors must come under close scrutiny and Sections 171 to 178 are intended to ensure that this is in fact the case.

 

It should be noted, that no matter how many legal experts have poured over the wording of a document or, as in this case the relevant sections of the Companies Acts, before it has been codified and made law, that there can be and more than usually are, any number of exceptions to the rule.

 

The UK government trumpeted the introduction of the provisions of sections 171 to 178 of the Companies Act 2006 when they were introduced as law as these laid out quite plainly the duties of directors in relation to a company and the thorny matter of corporate governance and responsibility. This was a long overdue change in the law and was rightly welcomed by shareholders and stakeholders alike. It was pointed out by many observers that section 172 of the Act was particularly relevant and radical, providing clear guidance to directors to make decisions which would “promote the success of the company for the benefit of the members as a whole”, added  to which they were compelled to consider the interests of stakeholder in general. However subsequent cases revealed that perhaps Section 172 was not as clear cut and radical as was first thought and as Hadjimarkou⁷⁶) contends, this Section of the Companies Act 2006 is ambiguous to say the least, in that whilst directors are given clear guidance over whose interests they must protect, there is no obligation for them to act ethically in protecting those interests,, as the paramount objective is solely to ‘ act in shareholders’ interests” in ensuring the success of a company. This section of the Act is therefore open to individual interpretation and moreover being subjective in nature, it is very difficult for Courts to find a breach of the act of duty, just as long as a director in question believed that he was, in fact, acting entirely in good faith to promote the success of the company. To illustrate this, it should be noted that success as far as a company is concerned can wear a coat of many different colours.  Increased dividends, a rise in share value, reducing company tax burden lawfully are all methods by which a company can measure success.

 

Hadjimarkou further contends that there are some situations in which UK Courts can take into account within the provisions of the Act much more objective matters and this has been illustrated in several court cases in recent years. For example Pennicuick ^77. stated that where a director has paid no regard as to whether a specific action is in the interests of a company an objective test needs to be applied. Quite succinctly this test is:“whether an intelligent and honest man in the position of a director of the company concerned could have reasonably believed that the transactions were for the benefit of the company”. Furthermore the courts are not obliged to accept a director’s arguments if evidence of some other objective elements provide for an opposing view. However in reality, if harm has been caused to a company following a director’s actions it still does not mean that the director concerned was not acting entirely in good faith. A thorny issue indeed!

 

 

 

• Methodology

Having first established the basis of the theoretical outlook and direction of this dissertation, it was then necessary to examine how all of the evidence would be gathered and then collated to support the arguments used in this work. Initially it was important to understand fully the question of corporate governance and responsibility being posed and to pursue all avenues of possible interest and concern in order to establish a research base from which to begin work. Therefore the principal requirements of this study were, in the first instance, to examine with close scrutiny shareholders and stakeholders alike and to carry out extensive research into their roles and responsibilities with regards to corporate governance as well as corporate social responsibility. What was also important was to realise who were stakeholders and who were shareholders and how they differentiate. A number of reliable sources were therefore utilised to reach a broad consensus on this point with special regard to scholarly articles, legal statutes, government reports and academic papers.

 

The basis of this work was designed to meet the requirements for a Law Degree. In doing so it was furthermore imperative to include an examination of the relevant clauses of the Companies Act 2006 and in particular those clauses appertaining to director’s responsibilities. However to establish the theoretical outlook of this dissertation, it was deemed necessary to examine how and from where all the evidence would be collated to support the arguments used in this project. Therefore a wide variety of sources were researched with copious use of the University library, together with newspaper, magazine and periodical articles and online resources as well. Moreover a basis for research was initially set up with internet access and university library access being key components. Also the use of an ample amount of relevant methodological literature was necessary with relevant research methods being utilised throughout the life cycle of this project.

 

Added to these research methods, historical analysis was also considered relevant to this project as it was necessary to utilise this approach to support the arguments espoused herein. Both qualitative and quantitative research was necessary during the course of this project as neither on their own could provide enough evidential support for my final conclusions. Therefore a combination of methods was required with the qualitative evidence particularly undergoing extensive data analysis procedures In regard to the qualitative research, a crucial timeline of six months was established to complete all the components of this project and also to analyse and assimilate all the data in order to assess the question and attempt to discover the answers. Qualitative research was undertaken simply because it gives a more specific insight into exploring the issues of corporate governance and social responsibility and how these two areas impact upon both shareholders and stakeholders alike.

 

Apart from the case studies and analysis, extensive literature searches were also carried out online via internet educational and scholarly resources as well as researching through library access at the university. This was a long and arduous task as there is so much information available and the time taken to disseminate it was disproportionate to the time required to write up the relevant citations.

 

Also to assist with the literature research, newspapers, magazines and periodicals were examined for articles relating to the subject. Once again there was a wealth of information available and crucially more became available during the course of this project and as I was finalising the entire research project. Therefore I was able to keep the project up to date and of the moment with the addition of late references which were relevant to the entire project. Finally scholarly articles and papers were also examined in order to understand corporate governance and CSR from another angle and a study of the Companies Act 2006 and in particular those sections relating to the duties of directors were given close and intense study.

 

• Conclusions

Corporate governance has generally been defined as a system by which companies are directed and controlled. As has been seen in this project, applied economic thinking makes an implication that when considering corporate governance, shareholder interests should be paramount. As has also been witnessed here, in many countries prominence is indeed given to the interests of shareholders. However in reality the degree of shareholder rights varies not only from country to country, but also from company to company. Likewise Corporate Social Responsibility has a huge variance depending upon country and company.  However, there are it seems, six guiding principles to the good corporate governance and these are perhaps the golden rules that all corporations should be following. Applied Corporate Governance.com⁷⁸  recognises those six principles as being:

1. ethical approach – Concerns of culture and society
2. balanced objectives – congruence of goals of all interested parties
3. each party plays his part – roles played by key players: owners/directors/staff
4. decision-making process in place – reflecting the first three principles and giving due weight to all stakeholders
5. equal concern for all stakeholders – albeit it is for certain that some have greater weight than others
6. accountability and transparency – to all stakeholders whatever their status

All these principles have been discussed in this project, but it appears that the most important area of corporate governance is accountability. When corporations lose sight of this basic premise, they lose control, and as this project has proven, when a loss of control happens, catastrophes can occur. Take note here especially of the BP Deepwater Horizon and the Primark disaster at Rana Plaza for example..  As has been recognised in this project such serious breaches of CSR are not solely confined to the UK, but are a worldwide problem and as has been witnessed, not all governments are taking action to ensure that companies and corporations become accountable for the decisions made in boardrooms that can have far reaching and sometimes disastrous effects.

 

There is, of course, the need for companies to undoubtedly maintain a vital competitive edge and to constantly improve their position in the marketplace and to drive up profitability: this benefits everybody in the long run.  Moreover to maintain an advantage over rivals in the same business it is essential that directors direct their efforts to this effect. However, in doing so, they must not lose sight of corporate responsibility, however as has been witnessed in this project many large companies have taken the pursuit of profit to extremes, forgetting or ignoring corporate responsibility and therefore causing huge and far reaching financial problems. For example, witness the major financial issues still facing BP six years after the Deepwater Horizon spill.  The Rana Plaza disaster, which with hindsight was definitely avoidable had the major companies involved carried out regular inspections of the buildings, cost the lives of 1,130 employees and un-associated people as well. This is, in my view, unforgiveable. The companies involved seemed uncaring and profitability was the be all and end all.

 

The financial crisis of 2007 – 2009 contends Keay⁷⁹ was caused by the lack of accountability of directors as regards corporate governance especially of financial institutions. Keay furthermore questions whether Section 172 of the Companies Act 2006 is fit for purpose as regards directors acting with the interests of members, first and foremost. Economies exist in cycles and judging what to do and at what point of an economic cycle is a crucial cog in the wheel of financial prudence. Keay further contends that the financial crisis was caused by not only misjudgement of the financial climate, but also by pressure placed on directors by speculative investors requiring a quick return on their investment. This was especially true of the banks at the time. The Rt Hon George Osborne, MP and Chancellor of the Exchequer, highlighted the key duties and obligations of all bank’s directors by signifying that it is: “an area which we overlook at our peril” as, “…the boards of banks who are supposed to be the first line of defence in relation to their own institution”  In the United Kingdom, this matter was openly deliberated in the House of Commons and resulted in the development of the Companies Bill which eventually led to a number of amendments to the Companies Act 2006 passing into statute.

 

Of course, these ever present controversies present significant challenges to existing models of corporate governance which have been largely constructed around the theory which, as has been witnessed in this project, allows boards of listed companies acting to act as agents of absent equity owners. It is imperative to realise that the ever fluctuating nature of capital markets only goes to examine the actual validity of the known models of corporate governance and corporate social responsibility.

 

Rather than treat current financial controversies as only fleeting matters that will be here today and gone tomorrow, it was necessary to explore them in more detail and to treat them as symptoms of a skew that exists between today’s worldwide financial markets and UK corporate governance frameworks. ICEAW⁸⁰

Corporate governance is the key component of this study and reveals how different corporations react to stakeholders and shareholders alike. CSR is more of a moral matter and it appears that it is often ignored in the harsh light of hard practicalities of multinational corporations.  Looking at corporate governance in broader terms, it can be seen that this refers to the way in which a company or corporations is directed and also administered, and controlled. CG of course, also concerns internal and external stakeholder relationships as well as the governance processes which are totally primed to assist a corporation in achieving its short term and long term goals, so contends Kent Baker⁸¹.

 

The Financial Reporting Council (FRC)⁸² has found that the level of decent corporate governance right across corporations in the UK remains high, despite the recent high profile cases cited in this project. The FRC also noted that there had been significant progress in CSR with gender diversity steadily increasing in UK boardrooms, although racial diversity still had some way to go to achieve an acceptable level.

 

In conclusion therefore it should be noted that there are rogue companies and corporations with a ‘stop at nothing’ attitude and a scant disregard of both corporate governance and social responsibility. However it is pleasing to note that more and more such ‘rogues’ are coming under the scrutiny of the FRC and increasingly Government select committees are questioning directors of such companies under the glare of the media spotlight with live TV transmissions from the House of Commons. Witness the discomfiture of Sir Philip Green when being grilled by the select committee over the BHS   pensions scandal earlier in 2016. Such public exposure can only assist in persuading others to keep their house in order as the scrutiny of the TV cameras can and will have an adverse affect on business profits with consumers turning away from rogue corporations and conducting their business elsewhere. Profitability is still the key aim, but achieving such profitability has to be conducted within the realms of CG and CSR and not at the expense of either shareholders or stakeholders.

 

 

 

 

 

 

 

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• Appendices

 

Gabrielle.  Include any appendices you feel relevant or delete this section.