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About this book

This textbook on corporate governance is written for advanced undergraduate and graduate law students, as well as scholars working in the field. It offers clear insight into this fascinating area of financial law, from the analysis of the legal and regulatory framework of corporate governance in the UK to the core laws and regulatory principles that determine the allocation of decision-making power in UK public companies.

This book also highlights how prevailing corporate governance norms operate within their broader market and societal context. In doing so, it seeks to encourage readers to develop their own critical opinions on the topic by reference to leading strands of theoretical and inter-disciplinary literature, along with relevant comparative and historical insights.

Table of Contents

Introduction to Corporate Governance

Frontmatter

Chapter 1. What Is Corporate Governance?

Abstract
Despite its rapidly growing academic popularity and practical relevance in recent years, ‘corporate governance’ remains a somewhat uncertain and contested term of reference. Indeed, if we were to ask a group of scholars or students to each specify what they understand the term to mean, it is likely that a number of highly varied attempted definitions would be offered. The most commonly cited definition of corporate governance in the UK is that provided in the influential 1992 Report of the Cadbury Committee on the Financial Aspects of Corporate Governance. The Cadbury Report is widely regarded as the nucleus of the modern regulatory framework for corporate governance both domestically and – to a large extent – globally. According to Cadbury, ‘[c]orporate governance is the system by which companies are directed and controlled’, for which boards of directors bear principal responsibility. The Cadbury Committee, Report of the Committee on the Financial Aspects of Corporate Governance (1 December 1992), para. 2.5. Expanding on this basic theme, the most recent (2016) edition of the UK Corporate Governance Code – in effect, the Cadbury Report’s contemporary incarnation – asserts that ‘[t]he purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company’. Financial Reporting Council, The UK Corporate Governance Code (April 2016), 1. Meanwhile, the internationally applicable G20/OECD Principles of Corporate Governance explain how, on a fundamental level, corporate governance ‘provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined’. Organisation for Economic Co-operation and Development, G20/OECD Principles of Corporate Governance: OECD Report to G20 Finance Ministers and Central Bank Governors (September 2015), 9.
Marc Moore, Martin Petrin

Chapter 2. Corporate Governance and Theory of the Firm

Abstract
In the previous chapter, we defined corporate governance from an academic perspective in terms of an enquiry into the causes and consequences of the allocation of corporate decision-making power. In particular, we explained how Anglo-American corporate governance is centrally concerned with how discretionary decision-making power is allocated within widely-held public companies, and – correspondingly – how senior corporate officeholders are held accountable for their continuing exercise of such power. We believe that this general understanding of corporate governance is shared more or less by all those who study and write about the subject academically in the United Kingdom and the United States, regardless of their particular normative disposition. Notwithstanding, a major argumentative fault line has long existed with respect to precisely how the above goals should be achieved. Accordingly, one’s perspective on how corporate power is most appropriately allocated and held in check is, on a fundamental level, conditioned implicitly by how one perceives the essential nature of a business corporation. That is to say, from a conceptual or meta-physical viewpoint, essentially what is a corporation in terms of the basic matter of its existence as a social institution? Only when we have dealt with the above question are we subsequently in a position to enquire as to the rightful allocation of corporate power.
Marc Moore, Martin Petrin

Chapter 3. The Corporate Governance Regulatory Architecture

Abstract
In the previous two chapters, we have sought to explain the essential nature of corporate governance as a subject of academic enquiry, and also the comparative uniqueness of the Anglo-American corporate governance paradigm. We have also highlighted the principal ways in which large business corporations are theoretically rationalized, and the implications of such views insofar as prevalent academic understandings of corporate governance are concerned. Accordingly, in this chapter, we begin to set out the contours of the applicable law itself concerning the governance of UK public companies. Whereas the subsequent parts of the book will examine the substance of the key laws and regulations pertaining to UK corporate governance, the present chapter is focused on the main sources and forms of law in this field. In other words, here we are concerned less with what the relevant rules and principles actually are, and more with the important preliminary concerns of: (i) where we should look to find the main aspects of UK corporate governance law; (ii) what essential form(s) those provisions take; and (iii) the principal ways in which the applicable regulatory framework is enforced in practice.
Marc Moore, Martin Petrin

Relational Aspects of Corporate Governance: Shareholders, Boards, Managers and Employees

Frontmatter

Chapter 4. Board Authority and Shareholders’ Rights of Intervention

Abstract
This chapter will discuss the decision-making primacy of a company’s board of directors as one of the most fundamental legal principles of UK (and, indeed, Anglo-American) corporate governance. The first part of the chapter sets out the main corporate-constitutional and common law rules that establish this basic principle, followed by an overview of the principal theoretical rationales for centralized board governance. The second part discusses the status and role of shareholders, focusing on rights of intervention in corporate decision-making – in particular participation in corporate voting – that shareholders are granted by virtue of company law (as opposed to shareholder engagement through additional or other means, which will be discussed in Chapter 5). This part will also discuss the practical significance of shareholders’ intervention rights and, finally, conclude with an assessment of the merits of ‘shareholder empowerment’ as a counterbalance to board primacy. The board’s primacy is reflected in both the UK’s Model Articles as well as the Delaware General Corporation Law, which both make clear that the ultimate power to ‘manage’ or direct the company is by default vested in the board of directors. Model Articles for Public Companies and Model Articles for Private Companies Limited By Shares, article 3: ‘Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company.’;
Marc Moore, Martin Petrin

Chapter 5. Institutional Investors and Shareholder Engagement

Abstract
In the previous chapter, we discussed the various formal rights of intervention in corporate decision-making that UK corporate governance law grants to shareholders. We also remarked on the fact that, at least in the case of public companies, these rights are very seldom used by shareholders directly. However, as we highlighted by recourse to our nuclear deterrent analogy, the mere fact that shareholders’ legal intervention rights are not used directly does not necessarily undermine their significant indirect functional value. That said, in reality the impact of those rights should not be overestimated, in light of the practical impediments to their effective implementation by shareholders. Accordingly, the corporate decision-making framework described in the previous chapter provides the formal backdrop to the lower-level, relatively informal methods of communication and engagement between shareholders, directors and managers that take place on an ongoing basis within public companies. It is these latter forms of interaction between key corporate governance constituencies that are the principal focus of our attention in this chapter. Of particular interest from this perspective are the various types of professional institutional investor who typically play the principal engagement role within UK public companies.
Marc Moore, Martin Petrin

Chapter 6. Corporate Governance and Labour

Abstract
In the previous two chapters, we examined the various respects in which shareholders are formally empowered to intervene in corporate decision-making, and also the many informal ways in which shareholders typically exercise collective governance influence over public company boards and managers on an ongoing basis. In this chapter, we temporarily shift our focus to consider an additional relational element of corporate governance, which is one of the most important in terms of ensuring the firm’s continuing viability as a productive and wealth-generating entity: that is, the status of employees within corporate governance. As we have previously remarked upon in this book, in view of the practical significance of human capital as both a productive and income-generating resource, it is at first sight somewhat perplexing why employees’ formal status within UK corporate governance is so heavily attenuated, at least in relation to that of shareholders. In Chapter 2 we analysed some conceptual considerations which arguably help to explain why, from a functional point of view, recognizing shareholders as the exclusive collective beneficiary of management’s discretionary decision-making power is in general prone to elicit positive economic outcomes. However, as we further acknowledged, this particular claim – whilst undoubtedly influential – is also highly contestable, not least with respect to those industrial sectors in which firm-specific human capital investments are at least as instrumental as standard financial capital investments in securing long-term corporate sustainability and success.
Marc Moore, Martin Petrin

Corporate Risk Management and Oversight

Frontmatter

Chapter 7. The Monitoring Board and Independent Directors

Abstract
In Chapter 4 we explored the board’s decision-making primacy and its importance as the most fundamental legal principle of UK and, more broadly, Anglo-American corporate governance. We also emphasized board primacy as one of the most important characteristics that distinguishes corporations from other business organization forms and their governance. However, the board’s broad authority and status at the top of the corporate hierarchy also raises fundamental questions. First, as we have explained in Chapter 1, much of corporate governance is about mitigating the problems that arise as a consequence of the separation of ownership and control. The board of directors plays an important role in this regard. Given shareholders’ inevitable informational limitations and collective action problems, the board becomes the main institutional mechanism to oversee the company and ensure ongoing corporate accountability. Following on from this is the crucial corporate governance question as to how to maximize the board’s ability to effectively discipline senior management and other actors further down in the corporate hierarchy.
Marc Moore, Martin Petrin

Chapter 8. Internal Control and Risk Management

Abstract
As we have seen in the previous chapter, a vital aspect of the modern corporate board’s role is monitoring. This includes responsibility for what are often referred to as internal control and risk management. The following sections will discuss these concepts in greater detail, exploring their meaning and emergence in corporate governance in both the UK and the US. The chapter will subsequently examine directors’ oversight liability: that is, individual board members’ personal responsibility for breach of company law duties relating to risk management and oversight. To begin, however, we should note that in general the following discussion is applicable to companies operating in all industry sectors. It will therefore not solely – and, indeed, not in greater detail – be concerned with specific developments in the field of banking law and financial regulation
Marc Moore, Martin Petrin

Managerial Incentives and Disciplines

Frontmatter

Chapter 9. Design and Control of Executive Remuneration

Abstract
In the previous two chapters, we examined the board of directors’ key monitoring and risk oversight functions within public companies. In this chapter we explore another concern that is central to the effectiveness of the board’s role in supervising management, namely its capacity to determine the remuneration (or pay) of the company’s senior executive officers. As we will see below, the level and forms of pay awarded to top-level corporate managers are crucial in providing such officers with powerful incentives to promote the success of the company for the benefit of its shareholders: in particular, by taking entrepreneurial risks that might otherwise put managers outside of their personal comfort zone. However, such incentives should not be so pervasive as to drive managers to undertake irresponsible levels of risk. This latter concern is especially pertinent in the banking and financial services sector where, as is now well-known, the systemic repercussions of unsuccessful risk-taking are potentially seismic both for shareholders and wider society
Marc Moore, Martin Petrin

Chapter 10. Regulation of the Market for Corporate Control

Abstract
At the outset of the book, in Chapter 1, we discussed how corporate power – in addition to being subject to limits imposed by laws and regulations – is also subject to various disciplining market pressures imposed by customers, suppliers, employees and investors. We also described the phenomenon of the separation of ownership and control and the problems that it may cause. Chapter 5 explored institutional investors and shareholder engagement as one particular aspect of the web of forces that constrain managers, while Chapter 9 looked at executive remuneration and its potential to help align shareholders’ and managers’ interests. This last chapter will focus on another external mechanism that may influence corporate decision-making and counteract problems stemming from the separation between ownership and control – that is, the market for corporate control
Marc Moore, Martin Petrin
Additional information