Enlightened Shareholder Value
and the
Companies Act 2006
Peter N. Taylor
LCCGE Presentation, 28th March 2014
1
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
LCCGE Presentation, 28th March 2014
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CA 2006: the timescale…
Steering Group (CLRSG) established in 1998
Four 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 2014
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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…
LCCGE Presentation, 28th March 2014
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The Steering Group’s considered options…
• An “enlightened” version of shareholder value
or…
• A “pluralist” approach
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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.
LCCGE Presentation, 28th March 2014
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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…!
LCCGE Presentation, 28th March 2014
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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.
LCCGE Presentation, 28th March 2014
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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.
LCCGE Presentation, 28th March 2014
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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?
LCCGE Presentation, 28th March 2014
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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.
LCCGE Presentation, 28th March 2014
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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?
LCCGE Presentation, 28th March 2014
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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?
LCCGE Presentation, 28th March 2014
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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”.
LCCGE Presentation, 28th March 2014
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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.
LCCGE Presentation, 28th March 2014
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ESV and CA2006: summary of results…
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.
References to Section 172 (1)
of the Companies Act 2006
(a) Do you have more regard
for likely consequences of
any decision in the long
term?
(b) Do you have more regard
for the interests of the
company’s employees?
(c) Do you have more regard to
the need to foster the
company’s business
relationships with suppliers
customers and others?
(d) Do you have more regard
for the impact of the
company’s operations on
the community and the
environment?
(e) Do you have more regard
for the desirability of the
company maintaining a
reputation for high
standards of business
conduct?
(f) Do you have more regard
for the need to act fairly as
between members of the
company?
Yes,
very
much
so
Yes
No
No
opinion
0
4
22
0
0
3
23
0
0
2
24
0
0
6
20
0
1
1
24
0
0
3
23
0
LCCGE Presentation, 28th March 2014
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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.
LCCGE Presentation, 28th March 2014
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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.)
LCCGE Presentation, 28th March 2014
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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?
LCCGE Presentation, 28th March 2014
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Enlightened Shareholder Value
and the
Companies Act 2006
Peter N. Taylor
LCCGE Presentation, 28th March 2014
20
Analysing ESV: a model for governance…
…relating three components of corporate governance:
Regulation by Law
Corporate Governance Code
Board Ethics
A model for corporate governance
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