Corporate Governance and Board of Directors

The assignment delves into the crucial role of boards of directors in corporate governance. It emphasizes their responsibility to ensure the achievement of an organization's objectives within a specified timeframe and highlights the importance of possessing the necessary skills and knowledge. The text also discusses the significance of ethical conduct in board selection, emphasizing transparency and fairness. It concludes by stating that boards are primarily accountable to the company itself rather than individual shareholders and that adequate remuneration should be provided for their services.

INTERNATIONAL
CORPORATE GOVERNANCE
LAW
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INTRODUCTION
Corporate governance refers to the rules, practices and regulations by which organization is
directed and managed by the directors. In every business organizations, shareholders plays an
important role in the stakeholders as they have ownership in the business through which they can
control operations and take part in the decision-making. Corporate governance ensure that all the
decisions must be taken by the board of directors and concerned committee in the interest of
stakeholders expectations. International corporate governance law emphasizes set of policies, rules
and practices so as to assure reliability, accountability, fairness and transparency of the business
operations conducted internationally.
It gives high confidence to the investors that company's directors will make decisions by
taking into account the desires and expectations of capitalist and satisfy them. Present project
assignment will critically analyse the extent to which international laws and codes of corporate
governance assist shareholders to take part in controlling business activities. Moreover, it will be
examined and compared with the role of Non-executive directors (NXDs) to assess its effectiveness.
Along with this, UK corporate governance codes 2010 will be evaluated which the organizations
needs to comply with. In addition to this, relevant case laws will be examined and explained to
support arguments.
Legal and theoretical issues raised by question posed
In the present scenario, it can be stated the governance of many public corporation is now
moving towards direction of shareholders. One of the main reason behind this is that the influence
of shareholders is increasing day by day along with the passage of time. Along with this the
proposal, activism and votes of shareholders has also increased to a great extent. It can be
expressed that the term corporate governance is still a new concept for many businesses in
marketplace. In simpler terms, it can be defined as the process which helps in distribution of all
rights and duties within managers and shareholders. Furthermore, the concept of corporate
governance also deals with areas related to directing and control of an organization 1. However, it
can be argued that one of the most important characteristic of corporate governance is to assist
companies in developing long term and healthy relations with all its major internal and external
stakeholders. It can be also expressed that one of the most important group which plays a significant
role in corporate governance is the directors of a business enterprise. Both executive and non
executive directors play their own role in part in corporate governance. It is legal responsibility of
each and every director to take care and manage all operations and activities of a company. On the
1 Tricker, R.B., 2015. Corporate governance: Principles, policies, and practices. OUP Oxford.
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other side of this, it can be argued that directors are also accountable and answerable to all the
shareholders of an organization. At the time of carrying out their duty, directors needs to understand
and become aware of the fact that they are the only one who is responsible for managing operation
of a company in the best possible manner. In last few years there has been many arguments done
in favour and against the topic that whether directors are owned to the company not to its
shareholders or not2. It can be stated that there are some duties which needs to be accomplished by
them in order to carry out smooth flow of activities and operations in long run. One of the major
duty among them is the duty of loyalty which is considered as a fiduciary duty. As per this concept
it is required by directors to make all decision which can results in providing benefits to company.
It can be expressed that the decisions should provide good and effective results to company. Thus ,
the duty of loyalty depicts the fact that it is the priority of directors to make sure that they prefer
decision which are beneficial for the entire company instead of only benefiting shareholders.
Another duty which needs to be accomplished by directors is the duty of care. This means that the
directors are required to make sure that situations such as conflict of interest do not arise in any
case. The directors are entirely responsible to make the most appropriate decisions by paying
attention on activities of a business enterprise. On the other side of this, arguments have been
carried out explaining that directors do not any kind of duty such as duty of care3. They are only
required to sit at top level of management and make decision which cannot be considered as rational
or partial. In the present scenario, American court has clearly supported the fact that directors will
not be held responsible for their decision in situations where the decision has been taken due to
conflict of interest. Another duty which needs to be taken care and accomplished by directors of a
company is the duty of disclosure. At the time of carrying out operations of a business enterprise or
making any kind of decision it is required by directors to disclose all the facts and figures related
with the same. However, it can be argued that disclosure of information become must in two major
cases which are when conflict of interest gets completed and when shareholder are being asked and
encouraged to give their respective votes. This disclosure is also important as it plays very
important role in claiming for compensations in court regrading the duty of loyalty which has
violated by directors of company.
In terms of theories of corporate governance, it can be stated that the simple finance model,
the stewardship model and the stakeholders model are generally used. As per the theory of finances,
the core or central problem which is linked with the concept of corporate governance is related to
2 Harford, J., Mansi, S.A. and Maxwell, W.F., 2012. Corporate governance and firm cash holdings in
the US. In Corporate Governance (pp. 107-138). Springer Berlin Heidelberg.
3 Wolfe Jr, D.J. and Pittenger, M.A., 2015. Depositions and Discovery Practice(Vol. 1). Corp and
Commercial Practice in the Delaware Court of Chancery.
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the development of rules and incentives regrading the same. Here the issue is that how rules can be
established which can be aligned with principal of owner and behaviour of managers. Along with
this, this theory also lay emphasis on the fact that the ability of shareholders needs to be limited and
they are also required to make sure that only adequate and required information should be provided
to them. On the other side of this, stewardship theory highlights the fact managers are one of the
most important steward and they are required to put best of their efforts towards enhancing
operation and activities of an organization in order to provide better profits to all shareholder. This
theory also encourages businesses schools to give more efforts towards enhancing the knowledge
and skill set of their students.
It can be asserted that there are some fiduciary duties which are owned by directors and
which needs to be accomplished. This can be justified by the fact that every directors plays a role
of company's agent and also act as a very important steward in managing its overall affairs. As per
the case of shareholders of Lloyds TSB and its directors the court made decision that there is no
such as fiduciary duty which has been owned by a director of a company towards its shareholder4.
The court also provide justification regrading the same that this is because they are director of a
company. Along with this, the legal relationship which exist between shareholders and directors is
only of providing information and suggestion to shareholder for a particular activity tasks or
activity.
In the present age of globalization, it is essential for the organization to have a sound legal
framework of corporate governance in order to assure smooth functioning of operations in the
capital market. It assure equitable treatment of investors by directors while carry out business
decisions. The main role of it is to protect investors right by examining the impact of potential
decisions on them. So that, board of directors will be able to meet their expectations 5.
Corporate governance code 2010: Corporate governance refers to the rules and practices by
business units are directed and controlled. In the present era, each organization undertakes the
framework of rules and practices which assists Board of Directors in ensuring the accountability,
fairness and transparency in working aspects. This in turn provides high level of assistance to the
business unit in maintaining relationship with the stakeholders. With the help of corporate
governance process company makes focus on making balance between the different stakeholders of
a company includes shareholders, employees, suppliers, government, general public etc. It is the
4 Olson, J.F. and Lanin, A.B., 2015. Roles and Responsibilities of Non-Board Participants in Corporate
Governance. Corporate Governance: Law and Practice, 2.
5 Soltani, B. and Maupetit, C., 2015. Importance of core values of ethics, integrity and
accountability in the European corporate governance codes. Journal of Management &
Governance. 19(2), pp.259-284.
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accountability of the firm to perform their work in such a manner which satisfies the expectations
of different stakeholders 6.
UK corporate governance code sets some standard of good practice in relation to the board
leadership and effectiveness, remuneration, accountability and relations with shareholders. All the
companies of UK who are listed on FTSE 100 index needs to follow the all the rule and regulations
which are framed by Financial Reporting Council (FRC) during the preparation if final accounts.
This code contains broad principles and more specific provisions. According to such code listed
companies require to specify about the aspect that how they have applied the code,. Besides this,
companies also have requirement to provide explanation about the areas where they do not comply
with the code. Further, according to provisions which are mentioned in the schedule B require
disclosure of information to comply with the code. Moreover, this code is framed with the aim to
build or develop faith in mind of shareholders in relation to the respective business operation. When
firm provides shareholders with the clear explanation about the code which they have not applied
then it prevents confusion from the mind of them 7.
Along with this, for maintaining transparency FRC also publishes guidelines which assists
boards about the ways through which they can consider or apply code in specific situation.
Guidance addressing the aspects such as board effectiveness, significance of audit committee and
risk management, internal control, going concern and other concepts of accounting etc. Sections to
which companies who are listed on the London stock exchange requires to follow several aspects
which are enumerated below:
Section A: leadership
This section entails that every listed company must establish the team of board who will be
accountable for fulfilling the organizational aims and objectives. Further, there should be clear
delegation of roles and responsibilities of the personnel who are the part of board team. For
instance: Executives have responsibilities in relation to the running of a business. Whereas,
chairman of the business unit has accountability to lead members of the board by providing
guidance to them. Hence, chairman of the business enterprise has role to ensure that the members of
board perform their work in an effectual manner. Along with this, non-executive directors are
assigned with the responsibility to provide help in developing the strategy in an effectual manner.
Section B: Effectiveness
According to the this section of corporate governance code member of board and committee
6 Tricker, R.B., 2015. Corporate governance: Principles, policies, and practices. OUP
Oxford.
7 Goergen, M., 2012. International corporate governance. Pearson Higher Ed.
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should have desired level of skills, qualities and competencies. This in turn, enables them to
perform their duties and responsibilities more effectively and efficiently. On the basis of this code,
company needs to follow the standard and transparent process for appointing the new directors to
the board. In this, board of directors require to give enough time to the company which will assist
in discharging their responsibilities in an effectual manner. Further, newly appointed director
should also attend induction session during the joining of board 8. Besides this, they also require to
attend training session on a periodical basis with the aim to update their skills, knowledge and
competency level. Further, the chairman of the corporation has responsibility to serve timely
information to the board members so they become able to perform their duties in a responsible
manner. Further, to measure the effectiveness of performance board members should undertake
annual formal evaluation process. Hence, by evaluating the performance of committee and
individual directors effectiveness of their performance can easily be measured. Besides this,
directors should also be provided with the opportunity to stand for re-election after the
predetermined time frame.
Section C: Accountability
On the basis of this section, the board has accountability to determine the extent to which
they need to take risk for achieving the strategic objectives of firm 9. Thus, members of the board
must have ability to build and maintain sound risk management and internal control system.
Further, board members also require to build the transparent system of risk management, internal
control for building the effective relationship with the auditor of a company. In this way, board team
is obliged to discharge the above mentioned responsibilities.
Section D: remuneration
The above section places more emphasis on offering the suitable remunerations to the
directors. Moreover, business unit can attract, retain and motivate the skilled directors only when
they appoint the directors by offering the appropriate remuneration. Through this, company can
retain the talented directors for the long span of time 10. It may result into smooth functioning of the
business activities. However, business unit should avoid to offer high in comparison to the amount
8 Muravyev, A., Talavera, O. and Weir, C., 2016. Performance effects of appointing other
firms’ executive directors to corporate boards: an analysis of UK firms. Review of
Quantitative Finance and Accounting. 46(1). pp.25-45.
9 Inwinkl, P., Piwonska, A. and Rimmel, G., 2014. Corporate governance disclosures of UK
banks in self-regulatory system. In 37 th Annual Congress of the European Accounting
Association 21-23 May 2014 Tallinn.
10 UK corporate governance code, 2016. Online. Available through: <
http://www.icaew.com/en/library/subject-gateways/corporate-governance/codes-and-reports/
uk-corporate-governance-code>. [Accessed on 18th June 2016].
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which is required for this purpose. Along with this, the remuneration of directors should also be
structured which will help in link between the individual and corporate performance. Further,
company has also liability to adopt formal procedure for setting the remuneration packages and
policies of individual directors. For ensuring the transparency in such system company should not
involve the respective director in deciding his or her own remuneration.
Section E: Relations with shareholders
Shareholders are also the owner of firm to the extent to which money invested by them. In
this, company is obliged to build or maintain effective relationship with the shareholders by making
alignment with the strategic objectives. Further, board of directors has accountability to conduct
annual general meeting with the investors. In this meeting, directors require to communicate all the
policies and strategies with the shareholders to encourage the more investment 11. Moreover, growth
of the firm is highly influenced by the faith which investors having on the functions and operations
of business. For instance: when faith of the investor will loose then they started to get back their
money by selling their securities. In this, company faces tough time in terms of their financial
aspects. Thus, it is highly essential for the business unit to maintain and strengthen their relationship
with the shareholders to the significant level.
Hence, by employing such code of practices companies can manage their business
operations in the best possible manner. Hence, this system of corporate governance will help
business unit in maintain the interest of stakeholders in an effectual manner. For instance: Morrison
who is one of the largest British retailer follows the system of corporate governance with the aim to
build distinct image in the mind of stakeholders. Company appoints and decides the remuneration
of directors by taking into account the rules and regulations of FRS 12. Besides this, business
enterprise also places more emphasis on the delegation of roles and responsibilities of directors so
they can perform their work in an efficient manner without the repetition of work.
Along with this, Morrison also organizes annual meeting to communicate the strategic
framework to them. This in turn resulted into the faith and trust of shareholders. Besides this,
chairman of the firm also encourages their directors to perform their work with high quality and
efficiency by reviewing their performance through standard or formal process. Along with this,
company also organize internal check control system to detect the errors which are present in the
financial statements of firm. This strategy provides assistance to firm in building effectual
relationship with the auditors. Thus, by adopting the system of corporate governance business unit
11 Mallin, C.A. ed., 2016. Handbook on Corporate Governance in Financial Institutions.
Edward Elgar Publishing.
12 . Li, J., Pike, R. and Haniffa, R., 2008. Intellectual capital disclosure and corporate
governance structure in UK firms. Accounting and Business Research. 38(2). pp.137-159.
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has raised their goodwill to the large extent.
D. Make appropriate use of case law and journal entries
International corporate governance can be easily understand with the UK case studies, given
here as under:
Rolled Steel Products Vs British Steel Corporation, 1982: It is a UK company case law
about enforceability of obligations towards an organization. It is the best case example for the ultra
vires before came into force the doctrine and provisions of Company Act, 1985. In this case, Rolled
Steel Product given guarantee to secure the SSS Ltd's debt to British Steel Corporation. The director
of Rolled Steel, named Mr. Shenkman was interested in SSS Ltd because he had guaranteed a debt
to the subsidiary of British Steel Corporation, named Colvilles. The company was authorised to
give guarantee as per the articles but still, the approval of the guarantee was irregular. The reason
behind this is Mr. Shekman was personally interested in the company henceforth, his vote should
not be counted for the approval of the guarantee at the time of board meeting.
Company's investors (shareholders) identified such irregularity and argued that this contract
can not be enforceable legally because of ultra vires and improper guarantee given by the directors.
In this case, court held the decisions that this transaction is not an ultra vires. It is because as per
Company Act, 1985, all the companies are entitled to conduct all the practices and actions which are
incorporated in the memorandum and article of association 13. Therefore, any act which is not
clearly mentioned in this articles will be called ultra vires and void. In the given case, directors was
authorized to give grantee for the debt therefore it can not be said that it is an ultra vires act. But
still, the contract was declared unenforceable because British Steel Corporation was having full
knowledge regarding such irregularity and lack of proper authority. Thus, it can not acquire any
rights in the given guarantee. This act emphasized clear difference between an act which is
conducted outside organization capacity and outside firm's objectives mentioned in the MOA and
AOA. In both the situation, shareholders have right to restrain the carried transactions or obliged
party who are responsible for it.
Guinness Plc Vs Saunders: This case is concerning about the power of companies to pay
remuneration to the directors. As per the legislation, companies are restricted or strictly prohibited
to construct rules for the payment of directors remuneration. In this case law, Guinness Plc
appointed a committee in which three directors had been recruited. Ernest Saunders was the
chairman and Olivier Roux and Tom Ward were hired to handle business activities or affairs during
13 . Walker, D., 2009. A review of corporate governance in UK banks and other financial
industry entities.
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the time of place bidding for the takeover of Distillers Company 14. Guinness placed highest bid
after Ward worth £5.2m. In this, Ward filled a case against company and argued that bid was
decided among all the committee members. He argued that Guinness Plc should prepare its Articles
of association and clearly express the maximum limit of remuneration to the committee. The new
owners of the Guinness Plc founded that company did not follow the rules mentioned in AOA.
henceforth, the amount of £5.2m need to be pay back. House of lord made decisions that Guinness
Plc was obliged to strictly abided to comply with the rules and regulations mentioned in AOA.
However, it was not followed by the company because in AOA, it was clearly expressed that
remuneration of the directors exclude special remuneration can not go beyond the maximum limit
of £100000 per annum. While, special remuneration can be given only in the case, when any
member of the committee gives special attention, devotion and dedication towards business affairs.
In this case law, Lord Templeman gave decisions that Mr. Ward received £5.2m for the advices,
suggestions and services relation to the bid. However, it was not authorised by the board of
directors of Guinness Plc. Henceforth, the act can not enforceable legally.
Re Horsley & Weight Ltd [1982]: As per the act, an organization is not eligible to pursue any
objects which are outside from those objectives and aims which are given in the memorandum of
association. This case stated that activities and actions which are beyond the directors power will be
consider as contravention of statue hence, will be void. This principle was initially applied to the
large statutory companies in order to prevent actions which are outside business objectives and
constitution 15. If it happen than will be consider ultra vires and will be legally void. As per the act,
MOA and AOA restricts the rights and authority of the directors. Moreover, shareholders have right
to inspect such registered documents any time and evaluate the validity of the taken decisions by the
directors. Moreover, as per Company Act, none of the company is entitled to deal with the
operations that are outside corporate aims and objectives 16. In MOA, there is a specific clause
regarding objectives. Henceforth, all the operations which re within the corporate objectives will be
consider valid and beyond this, will be void. In this case, lord made a decisions that if an
organization does not follow the authorization mentioned in MOA then it will be ultra vires.
Ashbury Ratilway Carriage Vs Iron Company Ltd v Riche (1875): This is the case in which
in the objective clause of MOA of the company, it has been clearly stated that it can make sell or
14 Keasey, K., Thompson, S. and Wright, M. eds., 2005. Corporate governance:
accountability, enterprise and international comparisons. John Wiley & Sons.
15 . Li, J., Pike, R. and Haniffa, R., 2008. Intellectual capital disclosure and corporate
governance structure in UK firms. Accounting and Business Research. 38(2). pp.137-159.
16 Cuomo, F., Mallin, C. and Zattoni, A., 2015. Corporate Governance Codes: A Review and
Research Agenda. Corporate Governance: An International Review.
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lend hire railway carriages, wagons, all other railway plaint, fittings, rolling stock and machinery in
order to carry out business functions of the mechanical engineers and contractors. So that, they can
merchandise timber, coal, metal, or all the other material items on the commission by working as an
agents. Company's directors made a contract with Riches so as to finance a construction company
of a railway line in the Belgium. All the directors of the company approved this contract however,
in later, organization repudiate this. As a result, Riche filled a law suit against company for the
violation of contracted terms. House of Lord made decisions that firm's MOA restricted such
contracts hence, it is beyond the company's objective and therefore, it is void contract. Further,
court made judgement that company has no right or authority to ratify this contract.
Attorney Vs General v Fulham corporation, 1921: In this case, corporation has legal
authority to provide cloth washing facilities to the customers so that they can wash their clothes in
washhouses. In this case, council decided that it can serve customers more effectively by delivering
washing services to the employees. So that, customers can collect washed cloths from the
corporation. For this, firm will charge some extra fees to washing cloths. The tax payer of the
council said that it was an illegal conduct because MOA mentioned that council is only eligible to
carry out business by providing washhouses rather than washing services. Henceforth, Sargant J
made judgement that this action of the council was completely outside the set objectives and targets.
Henceforth, it will be ultra vires.
CONCLUSION
From the above report, it can be concluded that there are various types of duties which are
being owned by directors of a company. Furthermore, in order to operate smoothly and achieve
higher success in long run, they are required to accomplish their activities and duties in the best
possible manner. Along with this, it can be also inferred that it is required by directors to make sure
that all aim and objective of an organization are achieved within a specific period. On the other
hand, the board of directors also needs to have adequate skill set and knowledge in order to perform
the activities and task which are being assigned to them and which are their core duties. However,
it can be argued that good code of conduct clearly highlights the fact that businesses must choose a
fair and transparent policy in terms of selection board of directors. From the above carried out
study, it can be also concluded that broad of directors are accountable only to company and it is not
accountable to all shareholders. It is also required by companies to make sure that adequate and
appropriate remuneration is provided to all broad of directors against the work done by them.
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