Chapter 2 Concept of `Good `Corporate Governance in the
UK
2.1 Introduction
Traditionally, the early work of Berle and Means is
recognised as the origin under
119
modern Common law. Corporate governance has been
practiced for as long there
have been corporate entities, yet the study of
the subject is less than half a
century; indeed, the phrase 'Corporate Governance' was
scarcely used until the
120
121
1980s,and the whole topic was overlooked until recently. The
expression'....is concerned with the way corporate entities are governed
,as distinct from the way business within those companies are mange. Corporate
governance addresses the issues facing boards of directors, such as the
interaction with top management , and
relationships with the owners and others interested in the
affairs of the company...'
In 1978 Clifford C. Nelson, wrote that' corporate
governance is a fancy term for the
various influences that determine what a company does and does
not do or should and
122
should not do'. Even if the practice of corporate governance
is ancient, the theoretical
123
exploration of the subject is relatively new. All business
enterprises need funding in
order to grow, and it is the ways in which companies are
financed which determines
their ownership structure; it became clear centuries ago
that individual entrepreneurs
and their families could not provide the finance necessary to
undertake developments
required to fuel economic and industrial growth; the sale
of company shares in order
to raise the necessary capital was an innovation that has
proved a cornerstone in the
124
development of economies worldwide.
119. A. A. Berle Jr and G. C. Means, 'The Modern Corporation
and Private Property'.
120. R .I. Tricker,' Corporate Governance : History of
Management thought'.
121 .R .I. Tricker, 'The Independent Director-A Study of the
Non- executive director and
the Audit Committee'.
122 .cited in Dill.1978.
123. R .I .Tricker, 'Corporate Governance'.
124. J. Solomon and A. Solomon,' Corporate Governance and
Accountability'.
Solomon argued that the rise of the global
institutional investor as a powerful and
dominant force in corporate governance has transformed
the relationship between
companies and their shareholders and has created a
completely different system of
corporate governance; ownership structure is no longer
widely dispersed ,as in the
model presented by Berle and Means, but is now
concentred in the hands of a few
125
major institutional investors. Under Common law, since the
early period, the House
of Lords' s decision in Solomon v Solomon
& Co. Ltd established the separate
126
identity of the company. Here, Lord Halsbury LC said:
`I must pause here, to point out that the statute enacts
nothing as to the extent or degree of interest which may be held each of the
seven (subscribers ) or as to the
proportion of influence possessed by one or the
majority of the shareholder over
the others. One share is enough. Still less is it
possible to content that the motive
of becoming shareholders or of making them shareholders is
a field of enquiry which the statute itself recognises as legitimate, if there
are shareholders, they are shareholders for all purposes; and even if the
statute was silent as to the recognition of trust, I should be prepared to hold
that if six of them were the cestuis que trust of the seventh, whatever might
be their rights inter se, the statute would have made them shareholders to all
intents and purposes with their respective rights and liability, and dealing
with them in their relation to the company ,the only relations which I believe
the law would sanction would be that they were corporators of the body
corporate'.
127
The House of Lords 'decision in Solomon has been
criticised as going too far.
The contemporary comment of the Law Quarterly Review
was that the House
of Lords had recognised that one trader and six dummies would
suffice and that the
128
statutory conditions were mere machinery. Farrar points
that all legal personality
129
is in a sense fiction the creation of legal artifice.
Corporate personality is essentially
a metaphorical use of language clothing the formal group
with a single separate legal
130
identity by analogy with a natural person. Metaphors in
fact abound in this area of
131
law, both to support and to reject the separate
legal personality of the company.
125. J. Solomon and A. Solomon ,'Corporate Governance and
Accountability `.
126 . [1897] AC 22 at 49,HL.
127. J. Solomon and A .Solomon, 'Corporate governance and
Accountability'.
128. ibid
129. Farrar's company law'.
130. ibid
131.ibid
It is interesting to note that this case thus established one
of the basis articles of faith
of British company law, indeed of company law of all Common
law systems, that
company is a legal person independent and distinct
from its shareholders and its
managers.
The principle of separate identity has been consistently
applied as the New Zealand
case of Lee v Lee's Air Farming Ltd, which
went to the Privy Council, Lee owned
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all the shares but one in the company that he founded. His
wife held the other share.
Lee was governing director of the company whose
business was spraying crops
from the air. When he was killed in a flying accident
while on company business,
his widow was held to be entitled to recover
compensation from the company
for his estate as the company was quite separate and
distinct from her husband its
employee.
More recently, the European Community's 12th
Directive on Company Law (89/667),
was enacted in the UK in the form of the Companies (Single
Member Private Limited
Company) Regulations 1992, provision has been made for the
establishment of true
one man companies. This Regulations permits the
incorporation of private limited
companies by one person and with only one member. In
the UK, the debate on
corporate governance was greatly influenced by the 1992
Report of the Committee
chaired by Sir Adrian Cadbury on the Financial Aspects
of corporate governance.
The Cadbury Report described corporate governance as
the system by which
companies are directed and controlled. Boards of
directors are responsible for the
governance of their companies. The shareholder's role in
governance is to appoint the
directors and the auditors and to satisfy themselves
that an appropriate governance
structure is in place.
132.[1961] AC 12
The responsibilities of the board include setting
the company's strategic aims,
providing the leadership to put them into effect,
supervising the management
133
of the business and reporting to shareholders on
their stewardship. The board's
actions are subject to laws, regulations and the
shareholders in general meeting. The
importance of corporate governance for corporate success as
well as far social welfare
cannot be overstated; recent examples of massive corporate
collapses resulting from
weak systems of corporate governance have highlighted
the need to improve and
134
reform corporate governance at an intentional level.
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