Adapting to a Changed Legal Marketplace
John M. Westcott
John M. Westcott
Mystery is at the core of corporate law. The first question in corporate law is also the last: what is a company? It is a question that the legal philosopher HLA Hart (1983, 23) would prefer we did not ask, but given the centrality of companies to modern life, we cannot help ourselves as long as the fundamental issue of their essential nature remains contested. This chapter uses a historical lens in an attempt to identify what exactly a company is. It concludes that the modern company is a legal person that is an entity created by statute comprising a fund. The chapter shows that the modern form of the company as separate from shareholders is a consequence of default limited liability being granted in the mid-nineteenth century, although its consequences and benefits were not fully realized until later in the century. This analysis focuses on the English story but is of wider interest because the development of the modern business corporation followed a broadly parallel path in most jurisdictions.
One of the important lessons of the Global Financial Crisis (Crisis) was that cooperative banks proved considerably more resilient than corporate ones. Many observers have noted that cooperative banks were less prone to the risky practices that led to the Crisis, and attributed this to their organizational structure, which seemingly creates less incentive for profit maximization. This chapter investigates these observations from a legal perspective. It analyses the governing laws of cooperative banks in the US and the UK in order to explain how they may influence financial stability. In doing so, the chapter points out that many of the post-Crisis reforms are already embedded in the governance structure of cooperative banks. Specifically, cooperative banks in both countries face internal limits on growth and investment. More importantly, the cooperative model includes various disciplinary mechanisms to ensure that management acts in the best interests of the firm’s customers, who have little interest in profits. These include clear statutory purposes, democratic governance, fiduciary duties, strict conflict of interest rules, independent oversight committees and restrictions on compensation. Most of these features go much further, and address the profit motive more directly, than the post-Crisis reforms.
Susan Watson and P.M. Vasudev
Edited by Susan Watson and P. M. Vasudev
Franklin A. Gevurtz
While many criticize globalization as producing a ‘race to the bottom’ in which multinational corporations move activities to nations with less legal protections accorded to workers, the environment and so on, others argue that globalization may actually lead to an increase in legal protection, to ‘trading or globalizing up’. This chapter contributes to the dialogue by looking at globalizing up in the corporate law context by specifically analysing examples in which globalization has led to greater legal protections for minority shareholders against self-enriching conduct by controlling parties or large shareholders. While existing literature has examined globalizing up through the importation of corporate laws and corporate governance institutions by nations seeking to attract foreign capital for local corporations, this chapter, by discussing three recent cases, explores how globalization increases protections of minority shareholders when, as a result of international capital flows, foreigners become subject to a different nation’s more demanding corporate law.
In the largest traded public companies, the range of activities now undertaken by board committees continually expands in a way which means that increasingly they are occupying the board’s ‘space’. This chapter focuses on the role of the audit committee. It starts with a detailed consideration of the evolving remit of audit committees, so that we may appreciate just how wide-ranging an empire they have carved out for themselves at the expense, perhaps, of the board’s authority. It then moves on to assess the implications of this empire-building for committee members in terms of the expertise required of them, their workload and remuneration. It then discusses the relationship between the committee and the shareholders, which is as yet rather underdeveloped, though with some signs that shareholders are looking for better engagement with and improved transparency from the committee. The relationship with the board is also considered, examining in particular the potentially high standard of care, skill and diligence required of the committee members, which can be contrasted with the board’s residual (and probably quite nominal) duty of supervision. Finally, the chapter considers whether, given its pivotal role, the audit committee requires some additional statutory underpinning.
Shareholder wealth or stakeholder interests? The alignment of these two has been at the centre of self-regulation that has resulted from the increase in the number of corporate governance codes since the turn of the century. Mandatory ‘comply or explain’ is one of the principal ideas underlying the implementation of corporate governance codes in Europe. It combines flexibility and voluntariness of compliance with an obligation to give reasons for any deviation from code recommendations. Hence, codes of corporate governance are not legally binding in most legal systems. At the same time, however, and in accordance with the legislators’ intent, disclosure under the comply or explain principle serves as a self-enforcing market-based mechanism, which displays certain parallels with the corporate law and economics paradigm. The European Commission’s recent calls for improvements in the explanations for noncompliance imply that well-reasoned noncompliance is a sine qua non for the functioning of the comply and explain principle, giving real meaning to it and making a ‘culture of departure’ desirable. Therefore this raises the important question of what is driving code compliance and the underlying legitimacy of corporate governance codes. There may be rules that motivate corporate behaviour, but do not greatly affect corporations’ material interests. This aspect of compliance could open the door to extend the analysis beyond shareholder wealth maximisation to include stakeholder interests. As a starting point, the chapter will explore the significance of the comply or explain principle and its underlying enforcement mechanisms more generally. Against this background, an examination of compliance rates will shed light on companies’ reasons for following the code. The chapter analyses the rates of compliance with distinct provisions of the German Corporate Governance Code. Code provisions that exemplify the current corporate governance debate and the legitimacy problems that are raised include those regulating incentive pay, severance pay caps and age limits for supervisory board members. Analysis of these will lay the basis for an answer to the question of what motivates companies to comply with the code. Identifying that motivation could then pave the way to specifying what determined the regulatory evolution of the code and the range of stakeholders and their concerns.
China’s overseas investment is driven by the Chinese government’s ‘going global’ policy, formally launched in 2000. The top 100 Chinese companies, measured by Foreign Direct Investment (FDI), are mainly State Owned Enterprises (SOEs) that operate under the control of the State-Owned Assets Supervision and Administration Commission (SASAC), which is a government agency. There are currently 106 SOEs under SASAC, and these are considered national champions. As they continue to globalize, questions arise about how the governance of these SOEs would change in the face of the mounting political and regulatory pressure that is often seen in host countries. This chapter explores how the Chinese SOEs may change their governance practices as a result of internationalization. It investigates Chinese national champions’ reform pattern in the course of globalization. The study provides a better understanding of how globalization can promote SOE reform in China.