{"id":2654,"date":"2019-06-24T10:53:50","date_gmt":"2019-06-24T10:53:50","guid":{"rendered":"https:\/\/politicalquarterlyblog.preliveweb.site\/?p=2654"},"modified":"2019-06-24T10:53:51","modified_gmt":"2019-06-24T10:53:51","slug":"a-lawyers-perspective-on-corporate-governance-reform","status":"publish","type":"post","link":"https:\/\/politicalquarterlyblog.preliveweb.site\/?p=2654","title":{"rendered":"A lawyer\u2019s perspective on corporate governance reform"},"content":{"rendered":"\n

The ideas for\ncorporate governance reform espoused in the final report of the IPPR Commission\non Economic Justice make intuitive sense. But the question, from a legal\nperspective at least, remains: how feasible are such proposals likely to be in\npractice? Can they be operationalised via legal change, or will the spirit of\nthese proposals be blunted by the implementation process and the inevitable\ntradeoffs that are inherent in legislative reform? <\/p>\n\n\n\n

In its analysis of\nflaws in corporate governance, the IPPR\u2019s report highlights the economic and\nlegal confusions that surround how corporations or companies operate, and the significance\nof legal duties and powers enjoyed by directors, shareholders and other\nconstituents. <\/p>\n\n\n\n

Most business people\nat public companies would say that their overriding\nduty<\/a> is something along the lines of the passages quoted in the report:\n\u201cWe, as directors or executives, have an overriding legal duty to shareholders\nto maximise their returns.\u201d<\/p>\n\n\n\n

Such a perspective \u2013\nat least in legal terms \u2013 is completely false<\/a>.\nThe report is to be applauded for placing this falsehood front and centre. The\nproblem is what to do about it?<\/p>\n\n\n\n

The report\nrecommends redefining directors\u2019 duties to make it more explicit that companies\nare to be run in the interests of long-term success. This is a start, but is ultimately\nlittle more than tinkering with a model that needs more radical reform. <\/p>\n\n\n\n

First, courts are not\ninclined<\/a> to involve themselves in company affairs, save in cases of\ncorporate insolvency or corporate criminality. So whilst we don\u2019t have an explicit\nbusiness judgement rule<\/a>, as in the US or Canada, bringing directors\nbefore the court successfully remains difficult.<\/p>\n\n\n\n

Second, although the\nCompanies Act 2006 section 172 formalised the pursuit of shareholder value to\nan extent <\/em>(ie. by adding a section providing that directors have a \u201cduty to\nrun their company for the benefit of its members\u201d) the Act is not responsible for such primacy\ntaking root. This was established long\nbefore 2006<\/a>. In the absence of a separate mechanism, this type of\nlegal reform would be unlikely to change behaviour, for the simple reason that\ncompany law, in most circumstances, requires shareholders to litigate against\nthe directors if they are unhappy with their performance. This is unlikely to\nhappen in circumstances where shareholder interests are being prioritised. <\/p>\n\n\n\n

This is why the report\u2019s\nsuggestion to introduce a so-called \u2018Companies Commission\u2019 would be welcome. This\ncould transform the conduct of large corporations. Moreover, it would not be as\nretrograde as it may first appear: there are historical precedents for such\noversight. In earlier centuries, corporations could not exist unless created by\nthe government under a Royal\nCharter<\/a> or an Act of Parliament with the grant of a monopoly over a\nspecified territory (such as the British East India\nCompany<\/a>, established in 1600). <\/p>\n\n\n\n

There are also\nmerits in ensuring that the UK\u2019s takeover\nregime supports long-term value creation through the report\u2019s suggestion of a\nnew statutory public interest test which would be introduced for bids above a\ncertain size. Again, this is an eminently sensible approach, and a member\nof the Sheffield Institute of Corporate and Commercial Law (SICCL), Andrew\nJohnston, has just co-authored a very thoughtful piece<\/a>\non this. <\/p>\n\n\n\n

However, it may be\nless sensible to introduce limitations on shareholder voting rights to\nencourage long-termism. The report\u2019s motivation is understandable. Yet if as\nthe report claims, many shareholders are too short-termist, and are essentially\n\u2018share traders\u2019 rather than \u2018share owners\u2019, then such shareholders often have\nzero interest in playing a part in running the company. In the main, they are not\ninvested to engage with company boards, managers, strategy and so on. <\/p>\n\n\n\n

Many shareholders are\ninvestors for other reasons; for example, because they think those company\u2019s\nshares will increase in value relative to others (either individually or across\nthe market); for dividends; to free-ride on takeovers; or for regulatory\npurposes. So removing voting rights won\u2019t incentivise them to do anything\ndifferently. What might instead incentivise them are restrictions on dividend\npayments, or restrictions on the premium received after a successful takeover,\nand restrictions on share buybacks<\/a>.<\/p>\n\n\n\n

In this age, which\nremains characterised by an existential struggle between capital\nand labour<\/a>, worker representation on boards is another extremely\nimportant reform suggestion. This struggle, certainly in Western economies, is\ngoing to become ever more polarised. If we wish to avoid a long-term turn to\npopulism which we have witnessed recently in Europe and elsewhere, the\ninterests of labour have to be protected and, indeed, promoted. This is even\nmore pressing considering the structural imbalances in the UK economy, which is\nmigrating ever more towards financial services and high-tech, high-productivity\nsectors, and away from traditional industry.<\/p>\n\n\n\n

Overall, the IPPR\u2019s\nreport offers some far-sighted and very welcome suggestions for economic\nreform. In particular, it recognises the need for a fundamental shift in the\nstructure of the UK economy, and the key role of legislative reform in\nachieving this. With more lawyerly input, these may have been more likely to\novercome the procedural problems inherent in law reform, which is necessary to\nimplement some of the more radical changes envisaged. This is not to detract\nfrom the contribution made by the report to the debate: it has the potential to\nchange the economy and economic prospects for the better, and I welcome its\nrecommendations.<\/p>\n<\/span>","protected":false},"excerpt":{"rendered":"

The ideas for corporate governance reform espoused in the final report of the IPPR Commission on Economic Justice make intuitive sense. But the question, from a legal perspective at least, remains: how feasible are such proposals likely to be in practice? Can they be operationalised via legal change, or will the spirit of these proposals […]<\/p>\n","protected":false},"author":144,"featured_media":2655,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","_links_to":"","_links_to_target":""},"categories":[1395,1406,1396],"tags":[],"coauthors":[1620],"class_list":["post-2654","post","type-post","status-publish","format-standard","has-post-thumbnail","category-comment","category-economy","category-uk"],"amp_enabled":true,"jetpack_featured_media_url":"https:\/\/politicalquarterlyblog.preliveweb.site\/wp-content\/uploads\/2019\/06\/A-lawyers-perspective-on-corporate-governance-reform-nicola-fioravanti-641943-unsplash-scaled.jpg","_links":{"self":[{"href":"https:\/\/politicalquarterlyblog.preliveweb.site\/index.php?rest_route=\/wp\/v2\/posts\/2654","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/politicalquarterlyblog.preliveweb.site\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/politicalquarterlyblog.preliveweb.site\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/politicalquarterlyblog.preliveweb.site\/index.php?rest_route=\/wp\/v2\/users\/144"}],"replies":[{"embeddable":true,"href":"https:\/\/politicalquarterlyblog.preliveweb.site\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=2654"}],"version-history":[{"count":0,"href":"https:\/\/politicalquarterlyblog.preliveweb.site\/index.php?rest_route=\/wp\/v2\/posts\/2654\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/politicalquarterlyblog.preliveweb.site\/index.php?rest_route=\/wp\/v2\/media\/2655"}],"wp:attachment":[{"href":"https:\/\/politicalquarterlyblog.preliveweb.site\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=2654"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/politicalquarterlyblog.preliveweb.site\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=2654"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/politicalquarterlyblog.preliveweb.site\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=2654"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/politicalquarterlyblog.preliveweb.site\/index.php?rest_route=%2Fwp%2Fv2%2Fcoauthors&post=2654"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}