The DTI’s recently published consultation document makes it clear that there is an overwhelming need for reform and modernisation of company law. The last major review took place in the early 1960s, and since then, the whole pattern of regulation has changed. Today, rules and laws unimagined in Harold Macmillan’s day pour forth from the London Stock Exchange, the Financial Services Authority, the accountancy bodies (and all the institutions that have grown out of them, such as the Accounting Standards Board), and even the Takeover Panel. Since 1973, membership of the European Union has imposed a new layer of law, while new ideas about intangible assets – patents, brands, expertise – challenge conventional views about the balance sheet. The pattern of share ownership has changed – institutions now own 80% of listed companies – and yet any company law review must recognise that only 1% of UK-registered companies are publicly-quoted. Meanwhile, technology is making it possible for directors to report on their stewardship in new, cost-effective ways. At the same time, the development of concepts such as corporate governance and stakeholder society have shifted the debate about companies and their directors’ responsibilities towards shareholders, third parties and society as a whole. As it sets out this dramatic upheaval in the realm of corporate regulation and governance, the DTI’s company law review consultation document seems certain to herald a wide-ranging change in the approach to companies and their directors, and their relationship with shareholders. The review looked at the following eight issues (covered in seven sections of chapter 5): – The scope of company law – Small or closely-held companies – Company formation – Company powers – Capital maintenance – Regulation and the boundaries of the law – International aspects – Electronic communication. Accounting and financial reporting were not examined directly, but the steering group recognises (in chapter 6) that accounting issues will be raised by the review and welcomes comments on them. The Law Commission is also looking separately at issues relating to directors’ conflicts of interest (such as related-party transactions and compensation for loss of office) and the question of whether directors need a statutory statement of duties owed. In this latter respect the Law Commission’s work butts up against that of chapter 5 of the review. The largest section of the review, chapter 5.1, goes back to fundamentals, examining what is meant by “the company” and “the interests of the company”. On the one hand, an “enlightened shareholder value” approach would equate “the company” with its shareholders, but recognises that this does not mean it is in the interests of the company to maximise short-term profitability if that jeopardises value-creating relationships with employees, suppliers or customers. It notes that the Hampel report on corporate governance adopted this “inclusive” approach. Moreover, section 309 of the Companies Act 1985 explicitly states: “The matters to which the directors of a company are to have regard in the performance of their functions include the interests of the company’s employees in general…” That same section, however, makes it quite clear that directors owe their duty “to the company (and the company alone)”. From this, the review questions whether it is necessary to use legislation or other rules to clarify explicitly that directors should have regard to other third parties such as suppliers and customers when considering shareholders’ interests. On the other hand, however, the review considers whether the idea of enlightened shareholder value is simply wrong, in which case the interests of shareholders and a company’s employees, customers and suppliers are irreconcilable. If such a “pluralist” approach is adopted, company law may have to be changed to require directors not only to consider the interests of others but, in certain situations – in particular, takeovers and mergers – to rank those interests higher than those of shareholders, even at investors’ expense. To this end, the review asks whether directors should have permission – or even an obligation – “to have regard to wider social or ethical objectives, or to engage in philanthropic or community activity, at the expense of the interests of members” (emphasis added). It also wonders whether there should be a requirement for directors to report on relations with employees, suppliers, customers and the community, and on philanthropic activity and environmental performance. It acknowledges that the requirements imposed on small, closely-held companies may need to be different from those imposed on large, public or listed companies. But even if there is no dispute over the validity of the “enlightened shareholder value” approach, the review argues that the law as it stands is misunderstood and that, therefore, “there is a strong case for making explicit its true character… to ensure that directors recognise their obligation to have regard to the need… to build long-term and trusting relationships with employees, suppliers, customers and others… in order to secure the success of the enterprise.” Modern Company Law for a Competitive Economy: The Strategic Framework, DTI, February 1999, www.dti.gov.uk/cld/comlawfw/index.htm. THE INFLUENCE OF IT New technology such as video conferencing, e-mail and the Internet may change the relationship between companies and shareholders. It does not just change the medium of communication: electronic bulletin boards or discussion groups can also change the nature of a board meeting or annual general meeting from real time to non-real time. In a section of the review document that is specifically devoted to the issue, it argues that information and communications technologies offer “exciting potential for greater efficiency and for greater provision of information about the operation of companies. It is a high and urgent priority to facilitate their exploitation.” But new laws are likely to be necessary to enable companies to take advantage of IT where they – and their shareholders – wish to do so. For example, companies may be permitted merely to “post” their accounts on a website. “There may well come a time when publication at Companies House is superfluous,” the review suggests. Electronic voting or electronic lodgement of proxies may even help nominee shareholders communicate with beneficial owners. But part of the problem is that, while the postal service is ubiquitous, only 90% of households have a telephone and only 16% have Internet access. Technology may also make it no longer necessary for hard copies of documents to be available for inspection at a company’s registered office, if they are also available in electronic form, from, for example, Companies House, a share registrar or the Stock Exchange. Security is also an issue, the review says, but “a balance should be maintained recognising that in some respects the new technologies are more secure than the old.” Issues such as how accounts or minutes are to be signed if they are only available electronically raise curious, but not insurmountable, “probative” issues.
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