Roles of shareholders in the UK Corporate governance framework Essay Example

Roles of shareholders in the UK Corporate governance framework

Introduction

A fundamental significance of capitalism is that a company is essentially an enterprise operated by individuals who are in control (directors) and the owners (shareholders). Directors have a vital responsibility for acting in the company’s best interest, as well as to the advantage of the shareholders. On the other hand, shareholders authorize the directors to take charge of the company in their fiduciary capacity, while still retaining a considerable level of control to make decisions (Rosa et al. 2014). The agency theory is relevant to corporate governance framework, where a separation of control and ownership of the company exists. It also illustrates the manner in which misalignment happens, leading to conflicts between the interest of the shareholders and the director.

However, preventing such conflicts using regulatory and legal structures that delineate the rights, responsibilities, and roles of the shareholders and directors is a fundamental objective of the corporate governance. Still, while there is a relative acknowledgement of the fiduciary duties of the directors, there are still debates on the shareholder’s roles (Tomasic 2011). Basing on this backdrop, this paper critically discusses the roles of shareholders in the UK Corporate governance framework.

This essay argues that the UK Corporate governance framework severs to preventing governance conflicts between the shareholders and directors using regulatory and legal structures that delineate the rights, responsibilities, and roles of the shareholders and directors.

The UK Corporate governance framework delineates how shareholders should play a fundamental role of corporate governance. Rosa et al (2014) describes corporate governance as a system that facilitates the management and control of organisations. It is also principally concerned with companies and the relationship that the company’s management has with its shareholders. Corporate governance also entails the rules and regulations, and work procedure against which a company is controlled and run. Within the context of corporate governance, shareholders serve to pass particular rights with respect to the management decisions a company makes in relation to the voting rights (Rosa et al. 2014). Regarding shareholder’s fundamental role of corporate governance, the UK Corporate governance framework, which seeks to enforce good governance, uses a shareholder-led approach. The approach denotes how shareholders can play a fundamental role in corporate governance, and are, therefore, granted power through the Companies Act 2006 to oversee the roles of the board of directors. Although the Financial Reporting Council (FRC), which recommends and implements the Corporate Governance Framework, generally monitors the application of Combined Code in the UK, it is actually the shareholders who function as a company’s quasi-regulators (Financial Reporting Council 2012). The Combined Code refers to a principal approach to reporting or disclosure of corporate governance to the Listing London Stock Exchange. The shareholders evaluate the company disclosures, as well as monitor the Combined Code’s principles. Therefore, they may suggest that the directors adopt the Combined Codes’ recommendations.

The UK Corporate governance framework, therefore, allows the shareholders to control the company, as it defines the ownership rights they have to the company. The shareholder’s capacity to take on the directors on matters that concern stewardship of their capital investment depends on the rights that the UK company law grants to them (Renneboog & Szilagyi 2010). This may vary from provisions surrounding accessing information or even practicing voting rights and involvement in the annual general meeting (Tomasic 2011). The incorporation rights grants shareholders the right to arbitrate in cases where they perceive some governance failure, and therefore, permit them to practice a level of control relative to what they have invested in the company. Overall, these serve to see to it that shareholders are hedged from the erosion of their control in case the company decide to raise capital. This right is called pre-emption right. According to ICAEW (2006), a basic rationale of the pre-emption right is to offer the current shareholders a level of protection from losing control and transfer of wealth. In this regards, section 89 of the UK Companies Act 1985 demands that in the event that a company offers new shares, it has to issue them to the current shareholders, proportionate to the shareholding, before eventually issuing the share to the investors.

The UK Corporate governance framework also allows the shareholders to nominate or take out a director, select the board and decide executive compensation. In the UK, the shareholders play a role of appointing or removing directors from office based on a simple majority of the votes they cast, as provided for by section 303 of the Companies Act 1985 (ICAEW 2006). They may also calls for a resolution, based on section 368 of the Companies Act 1985, on condition that they embody not less than 100 members. Therefore, they can eliminate the entire boards of the directors at any time, instead of waiting until the annual general meeting (ICAEW 2006).

The UK Corporate governance framework also allows the shareholder to play a crucial role of actively engaging the directors to prompt them to discharge their fiduciary duties to the company stakeholders. Effective engagement, however, depends on the means of engagement they deploy. In the UK, the UK Stewardship Code seeks to necessitate active engagement between the company directors and the shareholders to promote lasting risk-adjusted returns to the company owners (Tomasic 2011). As ICAEW (2006) explains, the UK Stewardship Code was founded to help reform the UK Corporate Governance Framework and the Companies Act 2006 did not include provisions emphasising an engagement between the investor and directors. The Code emphasises that the investors should report on the degree to which they have applied the Code’s standards for monitoring and engagement with the company they have invested into, such as by disclosing their voting policy, as well as how they curb likely conflicts of interest (Rosa et al. 2014).

Conclusion

The central argument is that the UK Corporate governance framework severs to preventing governance conflicts between the shareholders and directors using regulatory and legal structures that delineate the rights, responsibilities, and roles of the shareholders and directors. It enables the shareholders to play a fundamental role of corporate governance. The shareholders, therefore, control the company, as they have the ownership rights to the company. It also enables shareholders to nominate or take out a director, select the board and decide executive compensation. It also enables shareholders to play a crucial role of actively engaging the directors to prompt them to discharge their fiduciary duties to the company stakeholders.

Problems and solutions

However, there are some problems with the UK Corporate Governance Framework. For instance, while it emphasises on shareholders and directors’ engagement, it does not anticipate general lack of accounting and finance experience or expertise of the shareholders as well as how this can affect the company’s performance and share prices. The corporate governance framework should therefore attempt to restrict shareholder activism, as the impact of shareholder inexperience in finance and accounting and activisms is uncertain. This is specifically so since shareholder activism is mostly stimulated by personal or political goals rather than financial interests of the company.

References List

Financial Reporting Council 2012, The UK Corporate Governance Code, viewed 17 March 2016, <http://www.slc.co.uk/media/5268/uk-corporate-governance-code-september-2012.pdf>

ICAEW 2006, Shareholder Responsibilities and the investing public, 17 March 2016, <https://www.icaew.com/~/media/corporate/files/technical/corporate%20governance/dialogue%20in%20corporate%20governance/shareholder%20responsibilities%20and%20the%20investing%20public.ashx>

Renneboog, L & Szilagyi, P 2010, The Role of Shareholder Proposals in Corporate Governance, viewed 17 March 2016, <https://www.edwards.usask.ca/csfm/_files/papers2010/3b-The%20Role%20of%20Shareholder%20Proposals%20in%20Corporate%20Governance,%20L.%20Renneboog%20and%20P.%20Szilagyi.pdf>

Rosa, H, Daniela, H & Markus, R 2014, «Corporate governance: the rights of shareholders and role of the board – a comparison of US, UK and Germany,» ACRN Journal of Entrepreneurship Perspectives, vol2 iss 2, pp.1-19

Tomasic, R 2011, «Company law modernisation and corporate governance in the uk— some recent issues and debates,» Victoria Law School Journal, vol 1, pp.43-61