Download - Enlightened Shareholder Value and the Companies Act 2006 Peter N. Taylor

LCCGE Presentation, 28th March 2014 1

Enlightened Shareholder Value

and the

Companies Act 2006

Peter N. Taylor


CA 2006: a (brief) introduction…

“The 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 1998


CA 2006: the timescale…

Steering 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


The Steering Group’s 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)

… and more…


The Steering Group’s considered options…

• An “enlightened” version of shareholder value

or…

• A “pluralist” approach


ESV: the two statutes. Firstly, directors’ duties…

s.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 company’s employees,(c) the need to foster the company’s business

relationships with suppliers, customers and others,(d) the impact of the company’s 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.


and secondly, directors’ report…

s.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 company’s 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 company’s employees and social and community issues. Subsection (6) adds a requirement for KPIs. And there are more…!


Enlightened Shareholder Value: a paradox..?

“This clause [of the Bill] does codify and bring into law for the first time duties around corporate responsibility…it is a deliberate act by the Government… for me, the key issue is how we marry the commercial success of … companies with sustainability and social justice.”

- Margaret Hodge MP, House of Commons Standing Committee D, 11 July 2006.

“There are two ways of looking at the statutory statement of directors’ duties: on the one hand it simply codifies the existing common law obligations of company directors; on the other – especially in section 172: the duty to act in the interests of the company – it marks a radical departure in articulating the connection between what is good for a company and what is good for a society at large.”

- Margaret Hodge MP, Minister of State for Industry and the Regions. Ministerial Statement, June 2007.


Enlightened Shareholder Value: a paradox..?

“I believe there is a fundamental gap in the Government’s train of thought: either they are introducing a new concept – enlightened shareholder value – which is an extension of the common law, or they are simply codifying existing common law.

Ultimately it will be for the courts to determine how far the new duties extend… But any settled case law will take time to develop, so watch this space.”

- speech by Jonathan Djangoly, MP, spokesman for the Opposition, given to the Chartered Secretaries’ Professional Group 6th Annual Technical Conference, 5th September 2007.


ESV: what the literature said…

- Problems of definition: “to have regard to”; “success”; “the long term”; “community”; “environment”. Guidance for directors?

- “Little different” from the traditional model, or a “Third Way”?

- Gives “legislative permission” to consider interests other than short term.

- Ensures that “UK law prevents director opportunism”.

- Problems of legal sanction.

- Is the Business Review fit for purpose?


ESV and CA2006: my contribution…

Research Objectives:

(1) To carry out an empirical study to ascertain the reaction of public companies and institutional investors to the ESV statutes.

(2) To propose a theoretical basis for understanding ESV.


ESV and CA2006: my empirical study…

Methodology (1)Pilot interview

Companies- questionnaire

- choice of population and sample- in-depth interviews

Investors- in depth interviews

Methodology (2)- analysis of the principal theories. What fits ESV best?


ESV and CA2006: the interviews…

Pilot interview (1)

Company Interviews (9)- reactions to CA2006 and subsequent action?- change in directors’ responsibilities?- derivative action?- reactions to s.417?- ESV v. SV?- Government policy?

Investor Interviews (3)- s.417: how effective?- Government policy?


ESV and CA2006: summary of results…

Pilot interview…

- “a good director before 1 October 2007 would be a good director now”.- s.172(1) trying to “instil a state of mind”.- board decisions to be minuted with a “paper chase” about decision

processes.- senior managers’ need to be aware.- the aim of s.172(1)… “to help directors understand their responsibilities”.

- “to treat the new duties as a mere codification may be reassuring, but it hides the subtlety and significance of changes”. Paying lip service … is not sufficient”.


ESV and CA2006: some conclusions…

1. The result is not zero.

2. ESV in CA2006 taken seriously by FTSE350 sample.

3. No improvement expected in shareholder value, but …

4. Majority have improved formal procedures for Board paper preparation.

5. Some indication of an increased aversion to risk.

6. No concerns about derivative action (s.260), but…

7. Business Review: limited value to investors.


ESV and CA2006: summary of results…

References to Section 172 (1)

of the Companies Act 2006

Yes, very much so

Yes

No

No opinion

(a) Do you have more regard for likely consequences of any decision in the long term?

0

4

22

0

(b) Do you have more regard for the interests of the company’s employees?

0

3

23

0

(c) Do you have more regard to the need to foster the company’s business relationships with suppliers customers and others?

0

2

24

0

(d) Do you have more regard for the impact of the company’s operations on the community and the environment?

0

6

20

0

(e) Do you have more regard for the desirability of the company maintaining a reputation for high standards of business conduct?

1

1

24

0

(f) Do you have more regard for the need to act fairly as between members of the company?

0

3

23

0

Questionnaire results: directors’ duties…Of the 26 replies, six companies indicated that the Act would cause them to have a greater “regard” for s.172(1) (a) to (f). Of the six, two replies indicated a greater regard for one, two replies for two, and two for all six requirements of the Act.


ESV and CA2006: conclusions…

Factors to be taken into account for a theoretical perspective…

1. the political view of enlightenment.2. the literature critiques of enlightened shareholder value. 3. the analysis of shareholder and stakeholder theories, and others, as the competing

forces for the dominance of corporate governance.4. the empirical work of this study.

The conclusion was reached that enlightenment is best viewed as a theory which preserves the integrity of the shareholder model by mitigating against the possibility of market failure.


ESV and CA2006: subsequent work…

Additional literature critique:

Williams, R. (2012). ‘Enlightened Shareholder Value in UK Company Law’(UNSW Law Journal, 35,1, 360-377).

Further empirical study:

‘The Enhanced Business Review: Has it made Corporate Governance more Effective?’ (Villiers, C. and Aiyegbayo, O. (2011). Journal of Business Law, 7, 699-724.)

Additional contributions on effectiveness of Derivative action:

Keay, A. and Komin, L. (2014). Directors’ Duties. Chapter 14. Jordans.

Further theoretical work:

‘An Analysis of Enlightened Shareholder Value in Light of Ex Post Opportunism and Incomplete Law’(Keay, A. and Zhang, H. (2011). European Company and Financial Law Review, 8 (4), 445-475.)


Enlightened Shareholder Value: some reflections…

How is the evolution of Shareholder Value underpinned by law in other jurisdictions?

Can the law make a contribution to the ethics of corporate governance?


Enlightened Shareholder Value

and the

Companies Act 2006

Peter N. Taylor


Analysing ESV: a model for governance…

…relating three components of corporate governance:

A model for corporate governance

Corporate Governance Code

Board Ethics

Regulation by Law