Enlightened Shareholder Value and the Companies Act 2006 Peter N. Taylor
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Transcript of Enlightened Shareholder Value and the Companies Act 2006 Peter N. Taylor
Enlightened Shareholder Value
Companies Act 2006
Peter N. Taylor
LCCGE Presentation, 28th March 20141Study of corporate governance - not long before come across Shareholder Priority.Not my management experience. Shareholder model neither descriptive or prescriptive.
Arrival of ESV and CA 2006 opportunity to reappraise the shareholder model.
1998: One year into New Labour Government. Fell to New Labour to carry out Law Commissions recommendation to update law.
New Labour gave a political slant to the whole project.
The longest Bill ever considered by Parliament 1300 sections (2 tonight!)
Structure of talk.Narrative.Research project.ConclusionsFurther work.
To kick off - heres what the DTI said about the plan
1CA 2006: a (brief) introductionThe object of the review will be to bring forward proposals for a modern law for the modern world. The Government is determined that the nation should have and up-to-date framework which promotes the competitiveness of UK companies and so contributes to national competitiveness and increased prosperity
- Modern Company Law for a Competitive Economy, DTI, March 1998LCCGE Presentation, 28th March 20142Margaret Beckett also had observed thatlaw out of date. Legislation dating back to the mid-nineteenth century.
Right from the beginning, there was a problem:
The Law Commissions plan was that it would be a law reform measure designed to preserve the substance of the existing law where it worked as well, but incorporating improvements in the light of the review process.
But, as often is the case, it became the basis for achieving political objectives.
This issue (simple improvement versus political objectives ) was at the heart of the difficulties encountered as the process moved from Review to the final Act.
I will explain as we go along.
2CA 2006: the timescaleSteering Group (CLRSG) established in 1998Four Steering Group reports: - The Strategic Framework - Developing the Framework - Completing the Structure - Final Report (July 2001)Govt. White Papers (July 2002, March 2005)
Company Law Reform Bill, 2005
Royal Assent, 8th November 2006
Majority of provisions came into effect on 1st October 2007
Full implementation on 1st October 2009
LCCGE Presentation, 28th March 201431998 to 2006 a long time. Begins with setting up of SG.
Steering Group (14 members) government, lawyers (incl. a High Court Judge), Business, Broadcasters, Economists and Accountants.
Consultative Committee of 30 members.
Several working groups one of which was devoted to reviewing the purpose of the company and the role of directors (17 members). Thats the one which concerns us.
2002 White Paper called Modernising Company Law. Didnt add or clarify much.
2005 White Paper called Company Law Reform. By which time the Government had accepted nearly all SGs recommendations, including draft clauses on directors duties. Interesting to note that the SG wasnt obliged to do this.
Royal Assent was received in November 2006
Majority of provisions (inc. ESV Sections ) came into effect on 1 October 2007.
Full implementation on 1st October 2009. 3The Steering Groups observations the objective of reform should be to achieve competitiveness and efficient creation of wealth for all participants in the enterprise. At the same time the aim should also be to minimise the negative impact of corporate activity and to maximise welfare more widely
the present scheme of law fails to recognise that businesses normally best generate wealth where participants operate as teams and that managers should recognise the wider interests of the community in their activities
the law as currently expressed and understood fails to deliver the necessary inclusive approach
(Modern Company Law: The Strategic Framework, paras. 5.1.8, 5.1.9 and 5.1.12)
LCCGE Presentation, 28th March 20144Here the Steering Group is saying what the reform process should achieve and what the perceived limitations are of the existing law. Actually, they said quite a lot, but
So, the law should help to create wealth; it should minimise the downside of corporate activity ,and it should maximise welfare widely .
It criticises the failure of the law to recognise teamwork in the enterprise and it fails to deliver the necessary inclusive approach, that is, it fails to recognise the part played by all those involved in the productive enterprise.
These extracts are taken from The Strategic Framework, the first SG publication.
More - They also noted what they called the changing relationships among the participants in business activity, etc.
In a dispersed equity market. managers could escape shareholder control shareholding now concentrated pressure for short-term results as a result, suppliers of goods and services would less willing to make investments in plant or organisation needed for customer-specific requirements.
Inclusivity and the avoidance of short-termism became the key Steering Group issues which the proposed new legislation should address. 4The Steering Groups considered optionsAn enlightened version of shareholder value
A pluralist approachLCCGE Presentation, 28th March 20145SG said that there are two broad forms of argument to deal with these issues
Pluralist approach not Stakeholder theory. Economic benefit only.
The Pluralist arguments: several, and a typical example was the observation that
By elevating shareholders to a dominant position difficult to develop the relationships of trust necessary for the long-term sustainability and efficiency of a business. equal treatment necessary to ensure that non-shareholder participants could feel confident about making the necessary firm-specific commitments.
The Enlightened Shareholder Value argument. Perceived Pluralist advantages could be dealt with within ESV in other ways. In particular trust could be achieved by a normal bargaining process, and in any case an efficient bargaining process should be dealt with by means other than changes to company law.
Also, there would be no change in the ultimate objective of companies, as per the Law Commissions report, 1999 and no fundamental reform of directors duties would be necessary and there would be no need to change the rights of shareholders to appoint or dismiss directors. ------------Outcome: Shareholder Value should be enlightened by (i) clear statement of directors duties and (ii) greater disclosure of information .
5ESV: the two statutes. Firstly, directors dutiess.172 Duty to promote the success of the company
(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and, in doing so have regard (amongst other matters) to (a) the likely consequences of any decision in the long term,(b)the interests of the companys employees,(c)the need to foster the companys business relationships with suppliers, customers and others,(d)the impact of the companys operations on the community and the environment,(e)the desirability of the company maintaining a reputation for high standards of business conduct, and(f)the need to act fairly as between members of the company.LCCGE Presentation, 28th March 20146Directors must have regard to all the items (a) to (f).
Lets look at the Disclosure requirements : Go to Next Slide
Return from Slide 7:
Theres a problem here
Elsewhere in the Act, in s.170, it says duties are still owed to the company, which was the understanding prior to the Act, so what does s.172 mean?
The general duties specified in sections 171 to 177 are owed by a director of a company to the company, and it goes on to list them.
Something new, or simply codification of existing duties?
The meaning of s.172 has been much debated. More in a moment.
6and secondly, directors reports.417 Content of directors report: business review(1) -
(2) The purpose of the business review is to inform members of the company and help them assess how the directors have performed their duty under section 172 (duty to promote the success of the company).
(3)The business review must contain (a) a fair review of the companys business, and (b) a description of the principal risks and uncertainties facing the company.
Subsection (4) adds more detail and subsection (5) requires quoted companies inter alia, to report on future prospects; environmental matters; the companys employees and social and community issues. Subsection (6) adds a requirement for KPIs. And there are more!
LCCGE Presentation, 28th March 20147These two sections s.172 and s.417 constitute the ESV statutes.
This is a summary, because the list of requirements is quite large. Subsection (1) simply refers to which companies are affected small companies are excluded.
s.417 has its own history previously the OFR, introduced under secondary legislation to meet the EU Modernisation Directive.
Note that (5) requires quoted companies to give more information.
KPIs required by (6).
Theory of this is that full information is critical for an efficient market.
Note that important requirement was to audit directors duties under s.172.
Back to previous slide to discuss Contradiction.
7Enlightened Shareholder Value: a paradox..?This clause [of the Bill] does codify and bring into law for t