The Business, Innovation and Skills Committee
of the House of Commons has jumped on the bandwagon and launched an
inquiry into corporate governance. An analysis of governance is
drawing interest from a broad spectrum of people including our new
Conservative Prime Minister, the Labour chair of the Business,
Innovation and Skills Committee and the General Secretary of the
Trades Union Congress: each is, with some urgency, seeking to find
something to criticise or change and to champion the same.
Whist it is clear that the issue of
executive remuneration represents a concern which remuneration
committees and investors do not seem to have sufficiently
addressed. It is also apparent that politicians are saying things
which demonstrate little more than their lack of understanding. For
example, the Business, Innovation and Skills Committee document
raises a number of questions based upon two errors:
that executive and non–executive directors owe different
duties: they do not, they owe exactly the same duties; and
that the general duty of directors as set out in section 172 of
the Companies Act 2006 requires directors to focus on the long
term: this is not correct.
Each director is an equal in the
boardroom, owing the same duties to the company, whether executive
or not. The structure of the English unitary board remains a
key element of our company law and corporate governance settlement
and should not be tampered with, without proper consideration of
the full consequences.
General duty of directors
The Companies Act 2006 codified the
duties of directors into sections 171-177 and 182. The core
section is section 172 which states that "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 then continues to set out
six factors which should specifically be considered, including
"the likely consequences of any decision in the long
term". However, that is radically different to an
assertion that the duty of directors is to focus on the long
Clearly the time horizon of a business
has an impact on the manner in which it should present its
financial statements and it is therefore understandable that the
concept of long-termism has been introduced by the Financial
Reporting Council into the UK Corporate Governance Code (Main
Principle A1). The UK Corporate Governance Code is drafted to
support the decision making of companies with a premium listing
and, therefore, by extension, a level of permanence in corporate
In the coming months it will be
important to engage with policy makers on issues of
governance. However, those policy makers would do well to
start their investigations by properly focussing on the significant
body of work they have already created.
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An assignment of rights under a contract is normally restricted to the benefit of the contract. Where a party wishes to transfer both the benefit and burden of the contract this generally needs to be done by way of a novation.
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