Premium-listed companies are subject to corporate-governance regime which consists of inter-alia company-law, listing-rules, UK-Corporate-Governance-code (“UKCG-Code”) and is aimed towards resolving issue of Agency-Cost, Minority-Oppression and Stakeholder-Protection. UKCG-regime relies on shareholder-oversight to enforce good-governance, but also recognises its flaws and incorporates other safeguards.
Shareholder-Reliance:
CA,2006 empowers shareholders to appoint[1] and remove directors.[2]Shareholder approval is required for allotting new shares and [3]ratifying director’s conflict-of-interest.[4]They also have powers to call general-meetings[5], proposing resolutions therein[6] and getting queries answered.[7] Moreover, the authority to determine director’s remuneration lies with the shareholders.[8]Listing-Rules give shareholders of premium-listed companies a vote on large-transactions.[9]
CA,2006 follows a ‘contractarian-model’,[10]defining shareholders’ relationships with companies based on bargain they reached through shareholders’ agreement and/or through amendments to Articles(AOA)[11].In-fact, every grant of authority to the board in CA,2006 is qualified by ‘subject to articles’ leaving immense autonomy for shareholders to impose limitations.[12]Through this route shareholders have the ability to include reserve powers or carve-outs to control board decisions. Moreover,Section-33,CA,2006, gives the shareholder the right to enforce AOA against the company.
Directors have a duty to act in accordance with AOA, which means that a strong shareholder can fully-control how directors act.[13]Directors are duty-bound to act in the shareholders’ best-interests[14]and minority shareholders have the right to remedy any breach of duty through unfair-prejudice remedy or derivative-claim.Shareholders also have the right to petition the court to wind-up the company if it is deemed “just-and-equitable” to do so.[15]This shows that in theory, shareholders’ may have large rights of intervention in corporate decision-making.[16]
UKCG-Code and UK-Stewardship-Code,2020(USC) both encourage shareholders to participate in decision-making of the company. If shareholders don’t support a board resolution, it signals their dissatisfaction and the codes encourage the board to take note of it. Even if a resolution passes but with 20%-dissent, the board must look into and investigate shareholders’ concerns.[17] The Board should engage with shareholders and welcome their feedback.[18]
Moreover, to check directors’ powers, UKCG-Code mandates annual re-election of directors by shareholders.[19] In fact,voting-guidelines of the Pension-Lifetime Savings-Association suggests that shareholders may wish to vote against the re-election if he has declined a request from a shareholder for a meeting.
Flaws of Shareholder-reliance:
Dispersed-Shareholding: In contrast to family-run or closely-held Asian companies, premium-listed UK companies have dispersed ownership, often held through institutional-investors.[20]Such shareholders hold diversified-investments across multiple companies, lacking incentive or means to enforce good-governance, exacerbating the free-rider problem where each shareholder chooses to remain passive. [21]
Institutional-Investors: Despite outnumbering retail-investors, institutional-investors in the UK have limited influence due to their typically small-holdings and diversified-portfolios within companies. Conflicts of interest within financial-conglomerates and agency-problems between investors and fund managers also hinder their effectiveness. Concerns about adverse publicity and potential legal breaches, such as insider dealing or market abuse, further discourage their active involvement in corporate governance.
Short-Termism: Many shareholders prioritize short-term profits over good-governance, potentially selling shares rather than advocating for change.[22]
Information-Asymmetry: Shareholders struggle to monitor directors effectively due to factors like lack of expertise and information-asymmetry.[23]
Expressing-dissent: Shareholders have limited-opportunities to vote on resolutions and have limited-connections with other shareholders for support to make any significant change when they do vote. Practical challenges like lack of access to the board hinder shareholder-engagement.
Negotiating-AOA: Practically, despite flexibility offered by CA,2006 in distributing powers between directors and shareholders, directors tend to maintain dominance.Shareholders often struggle to negotiate for increased authority, leaving directors with more power. Courts have held that directors are not agents or servants of shareholders.[24]In Automatic Self-Cleansing, shareholders couldn’t force directors to sell company-assets because directors’ authority, defined in AOA, allowed them discretion in managing affairs, including asset-sales. This reflects a shift from the traditional view of shareholders as the company’s embodiment and directors as their agents.
Enforcing-AOA: In practice, shareholders’ ability to enforce AOA is restricted. They can only enforce provisions that grant them rights as shareholders(‘qua-member test’) and no action can be taken in case of procedural-irregularity.[25] Furthermore, directors are treated as outsiders to the AOA, and are neither bound by them nor permitted to enforce them. For instance in Quin-&-Axtens-v.Salmon it was held that shareholders cannot interfere with directors unless they are acting against the law.
Director’s Duty: Statutory directors-duties are owed to the company rather than the shareholders[26] and the shareholders have to go through a cumbersome and costly process of derivative-claim to enforce them. The process requires information about the company and directors, which may not be accessible.Calculating damages is also difficult. Similarly, unfair-prejudice remedy has its own limitations.
Other-Safeguards:
Directors: Apart from relying on shareholders, UKCG-Code establishes a governance-framework with checks-and-balances. It does this through a layered-structure with the Board, led by the Chair, overseeing management, led by the Chief-Executive.Board comprises both executive and non-executive directors.[27]Chair plays a crucial role in challenging the Board.[28] To enable the Chair to fulfill their duties effectively, the roles of Chair and Chief Executive have been kept separate.[29]
NEDs: UKCG-Code recognises that one cannot rely solely on shareholders to ensure good governance and hence has provided NEDs. It mandates combination of executive and non-executive directors, such that no-one dominates the board’s decision-making).[30]At-least-half the board, excluding the Chair, should be NED.[31]They are expected to play an active role in holding executive-management to account by providing constructive challenges and resolving the agency-cost problem.[32]For instance, Independent NEDs, led by the Senior Independent-Director, assess the Chair’s performance.[33]
Committees: The UKCG-Code also emphasizes the role of committees in promoting good governance. For example,Nomination-Committee ensures board-diversity, enhancing stakeholder-protection.[34]Audit-Committee oversees financial integrity and risk management, addressing agency costs.[35]Remuneration-Committee sets executive-pay, addressing stakeholder concerns and mitigating agency costs.
Public-Disclosures: Directors have mandatory obligation to prepare public documents like Annual-Accounts,[36]Directors’-Report[37],Strategic-Report.[38]These reports provide insights into the company’s operations/financial-performance. In particular, narrative reporting, which complements the numerical data in the accounts, offers clear and understandable information about the company’s position and future prospects.
Common-Law: Stakeholders can use tort-law to hold a parent-company liable for good-governance of its subsidiaries. Similarly, stakeholders can use piercing/lifting the corporate-veil to ensure good-governance.
Creditors: In Sequana, Courts recognised the directors-duty towards creditors under S.172(3),CA,2006. Separately, liquidators have locus to proceed against directors under Section 213,214(wrongful/fraudulent trading),Insolvency Act,1986.
Takeovers: Corporate-control theory posits that poorly managed companies become takeover targets. If a takeover is successful, directors are likely to lose their positions. This fear of job loss incentivizes directors to effectively manage their companies.
Diversity: UKCG-Code ensures good governance by preventing group dominance(group-think) by promoting diversity.
Way Forward:
UKCG relies on shareholders to uphold good-governance, but recognises its flaws and provides for other safeguards.However, despite efforts to address shortcomings, issues persist. This gap may be filled by active-stakeholders. For example, Germany’s two-tier board system[39], which includes diverse stakeholder representation, could serve as a model for the UK. Additionally, the UK could enhance oversight through regulatory-bodies like the FRC, emulating practices in Asia.
[1]Article-20,Model-AOA
[2]Section-168,CA,2006(‘shotgun’ right)
[3]Section-551,CA,2006
[4]Section-176,C,2006
[5]Section-303,CA,2006
[6]Section-338,CA,2006
[7]Section-319A,360C,CA,2006
[8] Sections-420,439,439A,CA,2006
[9]LR-10
[10] Moore-Petrin,p.72
[11]Section-21,CA,2006
[12]Shaw-&-Shaw,Scott-v.Scott
[13]Section-171,CA,2006
[14]Section-172,CA,2006
[15]Section-122(1)(g),Insolvency-Act,1986
[16]Moore-Petrin,p.77
[17]Principle-12,UK-Stewardship-Code,2020;Provision-4,UKCG-Code
[18]Principle-D,Provision-3,UKCG-Code;GBE(Para-34,37)
[19]Principle-18
[20]Moore-Petrin(p.12)
[21]Moore-Petrin(Chapter:3)
[22]Moore-Petrin(p.89)
[23]Gower
[24]Gramophone-and-Typewriter-v.Stanley
[25]MacDougall-v.Gardiner;Pender-v.Lushington
[26]Section-170(1),CA,2006
[27]GBE(para71)
[28]GBE(para61)
[29]Provision-9,UKCG-Code
[30]Principle-G,UKCG-Code
[31]Provision-11,UKCG-Code
[32]Principle-H,UKCG-Code,GBE-Para(103)
[33]Provision-12,UKCG-Code
[34]Provision-17,UKCG-Code
[35]Provision-25,UKCG-Code
[36]S.394,CA,2006
[37]S.415,CA,2006
[38]Section-414A,CA,2006
[39]Moore-Petrin
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