Corporate Law and Governance

CORPORATE LAW AND GOVERNANCE
“Corporate governance” refers to an arrangement of standards, practices, and regulations that
govern how firms are conducted, monitored, and governed by their shareholders. Among the
stakeholders of a corporation are shareholders, suppliers, customers, government regulators,
and management. The word incorporates both internal and external elements that influence
the interests of the organization's stakeholders. This responsibility falls on the board of
directors, who are in charge of developing a framework for “corporate governance” that is
most aligned with the strategic goals of the company.1
As of January 2019, the current “Corporate Governance Code” of United Kingdom applies
to all firms holding premium equity shares, notwithstanding of where they are formed. This
means that in the UK, corporate governance is now part of the legal system for publicly
traded corporations.2
In the course of carrying out their responsibilities, a number of theories define the interaction
between various stakeholders in the organization.As per“agency theory”, the proprietors of a
corporation engage the agents of the corporation (such as directors of the corporation) to
conduct work. A business transaction involves the representation of a principal by an agent,
and the agent is obligated to work in the principal's best interests at all times, regardless of his
or her own self interests. The conflicting interests of the principle and his or her agents, on
the other hand, may become a subject of contention since particular agents may not always
act in the best interests of the principle. This can lead to misunderstanding and conflicts
inside organizations, which can result in inefficiencies and economic loss.3
According to stewardship theory, a "steward" (business executives) is someone who looks
out for the interests of the shareholders or owners and takes choices in their best interests.
Creating and maintaining a profitable organization in order for shareholders to prosper is
their primary goal.Organizations that adhere to this idea consolidate the obligations of the
Chairman and Chief executive officer under the leadership of a single executive, with a board
1 Hynes, John. Corporate governance: theories, principles and practice. Oxford University Press, USA, 2008.
2 'What Is Corporate Governance?' (ICEAW)
<https://www.icaew.com/technical/corporate-governance/principles/principles-articles/does-corporate-
governance-matter> accessed 23 March 2022.
3 Hynes, John. Corporate governance: theories, principles and practice. Oxford University Press, USA, 2008.

of directors made up primarily of employees. Because of this strategy, employees will have a
more in-depth awareness of organizational processes as well as a deeper commitment to
ensuring the success of the business.4
A business's obligation extends beyond its shareholders, according to stakeholder theory,
which asserts that it owes a responsibility to a broader set of stakeholders. A crucial factor in
“Corporate Social Responsibility (CSR),” according to its originator and proponent, Edward
Freeman, is the recognition of the stakeholder theory as a key element in corporate strategy.
Some of the world's largest corporations claim to place CSR at the heart of their corporate
strategy. This relates to the core tenet of stakeholder theory, which is that the interests of all
stakeholders have inherent worth and that no single group of interests has the ability to exert
influence over others.5
According to the shareholder concept, a company's main job is to raise profits as much as
possible. Management personnel is employed to act as the shareholders' agents in order to
operate the firm in their best interests. Consequently, persons have a duty to act in their own
best interests, both morally and in law. This idea is out of date since it emphasizes short-term
strategy and increased degrees of unpredictability. A majority of companies have come to
recognize that focusing only on shareholder interests has its limitations, and they've begun to
address these problems. The Enron affair, as was described before, demonstrates the
theoretical limits of this approach. In this case, it was pressure on management to boost
returns to their shareholders that finally resulted in the manipulation of corporate finances,
which ultimately proved to be the firm's downfall.
“Effective corporate governance” helps decrease risk by reassuring shareholders in unlisted
firms that, while exiting may be difficult, their interests would be protected by the BOD and
management. A strong governance structure will also prompt consideration of exit
alternatives, providing extra reassurance to “prospective shareholders” choosing whether to
participate in the business.6
It is important to note that the “shareholder value” concept has not failed management; rather,
it is handling that has violated the “shareholder value” concept. In order to match
4 Hynes, John. Corporate governance: theories, principles and practice. Oxford University Press, USA, 2008.
5 Hynes, John. Corporate governance: theories, principles and practice. Oxford University Press, USA, 2008.
6 John Félicité, '8 Ways Good Corporate Governance Creates Company Value' (OCORIAN, 2021)
<https://www.ocorian.com/article/8-ways-good-corporate-governance-creates-company-value> accessed 22
March 2022.

management's purposes with those of shareholders, the concept of "shareholder alignment"
was developed. However, the liberal distribution of alternatives mostly succeeded to drive
value-oriented behaviour since their structure nearly assured that they would create the
opposite outcome.7
Value creation refers to the generation of value for shareholders, often known as “shareholder
value,” which is typically defined as profit maximization after capital costs. For this
seemingly narrow point of view, the standard justification is that, in order to maximize
shareholder value, organizations must create value for all of their stakeholders, and that, as a
result, maximising shareholder value is equivalent to maximising value creation for all
partners. For instance, a company that seeks to maximize “shareholder value” must provide
competitive products and pay competitive salaries, among other things. Furthermore, it is said
that “shareholder value” is much simpler and easier to evaluate than value creation for all
stake holders, yet it is difficult to hold managers accountable for ambiguous conceptions of
value creation.
According to a recent study, some organizations define value creation more broadly than
others in order to encompass value creation for other partners. There might be a variety of
valid explanations for this.
At the moment, stakeholder theory does not provide exact guidelines for how corporations
might make decisions that take into consideration the interests of all shareholders. As a result,
we investigate how “shareholder value” generation might be quantified and implemented
through governance practices. The core concept is that businesses should improve the entire
value they provide for all of their partners when contrasted to the best choice.
The single or primary goal of the corporation is to create wealth for its owners. Shareholder
value and stakeholder value don't have to be mutually exclusive. However, if a company only
cares about short-term gains and share price appreciation at the cost of long duration gains, it
runs the risk of sacrificing long-term value for shareholders in favor of short-term gains and
price appreciation. It is simpler to act on short-term concrete metrics of shareholder value
than extended intangible variables. Direct concentration on shareholder value may inhibit
investment in non-physical assets and may lead to the overriding of stakeholder interests for
short-term profits.
7 Alfred Rappaport, 'Ten Ways To Create Shareholder Value' (Harvard Business Review, 2006)
<https://hbr.org/2006/09/ten-ways-to-create-shareholder-value?cm_sp=Article-_-Links-_-
Comment&registration=success> accessed 22 March 2022.