INSIGHT + INFORMATION + LEADERSHIP

MAGAZINE> WINTER 2011 > ISSUE 05

INSIDE> COMPANY LAWIs the legislation keeping up? PAGE 18

ESP PORTALShareholder services revolutionised PAGE 24

‘‘ We have to reform’’Lord Digby Jones on education, skills, pensions and exports

UK ECONOMY

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One of the first examples of company law was the 1720 Bubble Act, prohibiting their establishment{ }

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feature company law

The UK business world is barely recognisable from the Victorian era, during which the first tentative company legislation was drafted. Last year’s introduction of the final tranche of the 2006 Companies Act represented the biggest single reform in modern times, but is there more to be done? What role should future legislation play in influencing corporate governance? And how can legislators expect corporate culture to evolve in the future? These are big questions – and we seek to provide some of the answers in this, the first of a series of White Papers from Equiniti.

When Robert Lowe, then President of the Board of Trade, first introduced a simple procedure for limited

company formation in 1856 (the Joint Stock Companies Act), he described it as “an experiment that should be tried”.

It was, says David Venus, an experiment that has continued ever since. “Perhaps there are some people who will agree with the sentiments of the Chinese Premier Chou En Lai in relation to this “experiment”,” he adds. “When he was asked in the 1970’s for his opinion on the success of the French revolution, he said that it was too early to tell.”

Over the years, the typical corporate structure has striven to achieve a careful balancing act between simplicity and security, uniformity and flexibility, and responsibility and efficiency. The fragility of this balance was of course brought sharply into focus by the banking crisis, and its implications for the wider application of company governance.

Given the sweeping changes in technology, communication and society

that have taken place over the course of the 19th and 20th centuries, the Companies Act was undoubtedly a long overdue (and long awaited) overhaul of existing legislation, which had been patched together from many previous Acts and statutes. With the final tranche implemented in October 2010, the Act made changes to almost every facet of company law, particularly affecting smaller businesses. But did it go far enough?

“The Companies Act represented a recognition that the world has moved on,” says Peter Swabey. “The Government was keen to take on the views of the market, and the Act was very inclusive. The primary benefit of the Act was around recognising and codifying change – we now have a good body of work to refer to, all in the one place.” But it wasn’t a perfect fit for all.

“The Act tries to imagine what a small company needs, and small companies make up 99% of the marketplace. Unfortunately, some of the elements that have been incorporated don’t work for large companies – for instance, the

BusinEss is changing. has coMpany law kEpt up?

our panEl of ExpErts Claire Davies Head of Secretariat, Lloyds Banking Group Tony ManwaringChief Executive of business think tank Tomorrow’s Company PeTer swabeyCompany Secretary, Equiniti DaviD venusSenior Director, David Venus & Company

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‘statement of capital’ does not work for companies with lots of shareholders.”

Claire Davies agrees – with 1,600 subsidiaries within the Lloyds Banking Group, there have been benefits for large groups as well as small companies. “Most listed companies have subsidiaries, so have been able to benefit from improvements such as standardisation of Articles, and dispensing with the memorandum, general meetings etc. The biggest benefit for listed companies, how has probably been the changes to facilitate electronic shareholder communication, finally bringing Company Law into the 21st century,” she says.

wake-up callWith a line now drawn in the sand with the Companies Act, there appears to be little further appetite for reform of company law – it was a topic notable for its absence in the main party political manifestos of this year’s General Election. Attention has, however, focused on the wider issue of corporate governance, particularly given the fallout from the banking crisis. Will this lead to significant political interference in the way businesses govern their own affairs?

“There is no doubt that the credit crunch was a wake-up call,” says Claire. “Firms in a number of sectors got used to doing business in a certain way without giving rise to any governance problems. Inevitably, a degree of box ticking crept in over time in some areas.

“Partly as a result of this, corporate governance is one area that has been very much in the spotlight since the credit crunch, resulting in a plethora of consultations. Of course it’s important to understand what went wrong and what needs to change, but I’d challenge the necessity for the number of reviews and new initiatives that have taken place without giving the earlier initiatives the chance to ‘bed in’.

"If you have the right calibre of people on your board, people with strong personal reputations to protect who want to do a good job , they will care about doing the right thing. Corporate governance should be about ensuring the right cultural behaviours rather than rules and regulations.”

Claire points to the existing

“patchwork” of regulation that already affects every move of her secretariat. “First there’s legislation ie private companies and public companies, both covered by the Companies Act,” she says. “Then there’s sector regulation - as a banking group, we’re regulated by the FSA, and as a listed entity we are subject to the listed regimes both in the UK and US. Then there’s the FRC’s UK Corporate Governance and, behind that, a whole raft of additional guidelines such as ICSA’s improved board effectiveness review, Smith and Turnbull. Currently there are numerous strands run by different bodies with different timescales, different agendas, and different terminology, but potentially all covering the same thing. It feels like a lot of fingers in the same pie. There must be a strong case for rationalising the overlapping interests of these various bodies to provide clarity.”

Whilst sympathetic to this, David Venus believes that this is, in part, the consequence of the ‘managers’ or 'agents' (i.e. the board directors) gaining an upper hand over the ‘principals’ (i.e. the shareholders). “The more principals there are – as in a public company – the more difficult it is for them to co-ordinate action,” he says. “Many believe this has led to the agents having too much power. It can be looked at as a battle between capital and labour, which labour – or in this case top management – has been winning to the detriment not only of the shareholders, but also to society as a whole.” This theme was taken up last year by an unlikely champion Lord Myners who, while acknowledging the irony of a Labour Minister advancing the proposition, called for a strengthened capitalism.

A consequence of all this has been the advent of the Stewardship Code, the Remuneration and the AIC Codes for financial institutions and other new or revised corporate governance measures aimed at redressing the balance.

uniformity and simplicityDavid also raises the issue of employee representation on boards – an area in which other European nations have long taken a much more progressive stance than the UK. “A serious debate over the two-tier structure fizzled out in the UK in the 1970s,” says David. “ and

there no longer seems any appetite in Europe to persuade or cajole reluctant jurisdictions to adopt the model.” He finds it surprising, however, that there has been no renewed debate in the UK following the recent financial crisis as to the possibility of top companies adopting the continental two-tier board approach.

An advocate of this structure is Sir Richard Greenbury, former Chairman of M&S, who became a convert following 12 years on the board of Philips NV. He was recently reported as saying that “ a supervisory board made up of seven or eight top businessman from a variety of disciplines is a much better way of controlling a very aggressive Chief Executive than a Non-executive Chairman”.

A further European initiative that has floundered is the dream of a common public limited company, uniform in nature and available throughout the community. In practice, the structure that was introduced, the Societas Europea or 'SE', is bound by the law of the member state in which it has its registered office – resulting in no less than 27 variations. Another issue is freedom of establishment. David says “after 50 years of the community, most member states, including Germany and France, continue to apply the registered office doctrine (i.e. the country in which a company’s management resides asserting jurisdiction, despite the company being incorporated elsewhere). This is against the text and spirit of the original EC treaty. The European Court of Justice is fighting back, aided by the adoption of a

cross-border merger directive at the end of 2005, and an EU services directive allowing the transfer of companies’ registered offices across boundaries. We are at last seeing a shift.”

But however great the desire for simplicity and uniformity in company law, other forces, such as terrorism, money laundering, recession and the dizzying pace of technological progress, bring with them the desire for tighter regulation. And looking further ahead, there are other issues that will also affect the future of corporate culture, such as environmental issues.

Tomorrow’s Company“We have had a significant period of review and reform of company law,” says Tony Manwaring. “But legislation alone cannot deliver the changes that are needed. For us now, the shift is towards behaviours and cultures, towards the quality of decision-making, and the frameworks within which those decisions are taken.”

Tomorrow’s Company is a research and education charity that encourages corporate structures to radically rethink how they operate in the modern world. One of its key initiatives, the Good Governance Forum, brings together business in the corporate and financial sectors, and leading professionals such as lawyers and accountants, to provide a multi-sectoral approach to reform. The group is taking what Tony refers to as a “sleeves rolled-up” approach, and aims to publish a series of practical recommendations to guide business practice.

Tomorrow’s Company advocates two key principles to corporate governance. Firstly, it places a strong emphasis on boardroom culture. Tony explains: “As the recession and credit crunch played out, it became increasingly clear that the sector needed to go beyond the compliance view of risk, to also see the qualities required to manage risk and innovation – the ability to challenge yourself, the ability to think in terms of complexity and uncertainty, and so on. That then challenged some of the views around the composition of the board, such as recruiting Non-executive Directors on a ‘whiter than white basis’.

“The primary focus had been on ensuring that there was no perceived

conflict of interest. Instead, there should be a recognition that the Non-executive needs to be able to understand the business model and to challenge the board. Boards should have a clear sense of their business model and mandate, their appetite for risk, and the way in which they will create long-term value. It should be a key role of the Chairman to ensure that this clarity of vision is lived up to.”

Tomorrow’s Company also proposes a system of stewardship, whereby business owners understand their particular responsibilities in creating long-term shareholder value and shaping the UK’s response to major global issues, such as climate change and avoiding a recurrence of the recent financial meltdown. The stewardship principle has been picked up by the FRC, which is investigating how it might be incorporated into the combined code of practice.

enlightened self-interestIn years gone by, machines and factories were the engines of commerce, but today value rests with less tangible assets – the people, the intellectual property. “People are classed as a cost rather than an asset on the balance sheet,” says David Venus. “But for many companies today, staff are all they’ve really got. It’s also now widely accepted that, as well as their shareholders, companies have a wider responsibility to their employees, their clients, their suppliers, the communities they work in, and even wider society in general.”

The result is that HR and corporate social responsibility will continue to feature more prominently in boardroom discussions. “The company is a vehicle for creating long-term value,” says Tony. “The evidence increasingly suggests that those companies that are not only aware of their economic, social and environmental responsibilities, but also see them as an opportunity, are likely to be more robust, more resilient and more effective vehicles of creation in the long term. I refer to it as ‘enlightened self-interest’".

So, as Claire Davies suggests, might the future of company law lie in supporting and encouraging the innovation and skills of individuals, rather than waves of overlapping reviews and regulation? Only time will tell.

feature company law

Claire Davies , Head of Secretariat, Lloyds Banking Group

Peter Swabey, Company Secretary, Equiniti

“Corporate governance should be about ensuring the right cultural behaviours rather than rules and regulations”

The primary benefit of the Act was around recognising and codifying change – we now have a good body of work to refer to, all in the one place.