Describe the Non-Shareholder Ways in Which Company Management Is Controlled and Governed

CGE Tutorial 3

1) Describe the non-shareholder ways in which company management is controlled and governed.

Company law- The director have fiduciary duties towards the company as it is the principle of law. They cannot do whatever they like because they have to act as the best interest of the shareholders. Their duties is to maximize the shareholder profit in the company. If happen conflict of interest, the director can be sued if they breach the contract. Moreover, the company law restrict the director transaction. For example, the company cannot give the loan to directors, It is to control the BOD from abusing their power.  The company must set an independent external audit of accounts.

2). Describe and compare the essential of “rules” and “principle” based  approaches to corporate governance and explain the meaning of “comply and explain”.

Law which is compulsory is under rules based approach. It is the rules and regulation that establish by the government in form of legislation. It is inflexible because the law forcing all the company to follow.  

Whereas, the principle approaches is not law but voluntary. It encourage the company to follow and if not follow should give reason. The principle is more flexibility compare to rules based approaches. It is because every company have different circumstances, it cannot force them to follow all principle- One shoe size does not fit all. The “comply and explain approach” is you have to explain why not comply to the principle. For example, the CEO should not become the chairman, but the person can both position. It is not comply to the principle and they should explain why not comply.

3. Explain and briefly explore the development of corporate governance codes in the U.K.

The Cadbury Report 1992

Principle-based approach

-Not Law but Voluntary (encourage to follow, if not follow should give explanation)

-Whether you got comply with Cadbury Code or not, you should publish the statement. (This is listing requirement, must follow) e.g. Fully compliance, if not fully compliance, explain why.

The Greenbury Report 1995

Fat Cats – Directors who get pay too high but is not inflected to the input.

-To have a balance between directors salaries and their performance.

The Hampel Report 1998

Brought together all the issues covered in Cadbury(principle-based, voluntary approach) and Greenbury(directors remuneration).

-Avoid ‘box-ticking’ approach: seek of change, but not spirit on changing.

The Turnbull Report 1999

-Give suggestion on how company can improve internal control(Barings case).

-Given the senior management too much control, lack of segregation, supervision, and recognition of unusual profits.

The Higgs Report 2003

-The NEDs must keep checking the EDs.

-Included a greater proportion of non-executive directors on BOD(at least half of the BOD) –more powerful.

The Tyson Report 2003

-Recruitment and Development of NEDs

-Greater diversity enhances relationship with stakeholders.

The Smith Report 2003

-concerned the relationship between external auditors and companies they audit, as well as the role and responsibilities of companies’ audit committees.

-monitoring company directors’ activities.

Redraft of the Combined Code 2003

-At least half of the BOD should comprise INEDs

-Splitting

-BOD should evaluate own performance

Internal control: Revised Guidance for Directors on the Combined Code 2005

-Maintain approach of Turnbull Report

Consultation on Further Revision of the Combined Code

-Minor changes to Combined Code.

4) Explain the following cases

A) The Maxwell affair

The Maxwell affair involving a conflict of interests and a superannuation (pension) fund is that involving the collapse of the Robert Maxwell media empire following his death in controversial circumstances on 5 November 1991. Robert Maxwell had built up a media empire with a mix of private and public companies. Some of his acquisition incurred large losses and Maxwell resorted to raiding the pension fund to prop up Maxwell Communication Corporation, which was part publicly owned and part privately owned by Maxwell.