Discuss the relationship that exists in the UK between the legal rules that govern directors' duties and principles of corporate governance.

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Company Law Coursework.

“Companies whose standards of corporate governance are high are the more likely to gain the confidence of investors and support for the development of their businesses”.

(Report of the committee on the Financial Aspects of Corporate Governance – Cadbury Committee Report (Para 1.6)

In the light of this statement discuss the relationship that exists in the UK between the legal rules that govern directors’ duties and principles of corporate governance.

        Corporate governance is a very wide topic area it does not have one set definition its literal meaning is that of united group control however it’s a much wider subject area. Corporate governance covers a wide range of issues from the role of the company secretary and legal department, to the business strategy, the roles of the executive and non-executive directors, the relationship between investors and companies and accounting and information systems. A corporate governance structure should set guidelines as to how responsibilities are distributed throughout the company it should also give guidelines on the decision making process. It should structure the way in which objectives are met and monitor the progress in meeting such objectives.

        Companies need to maintain a good corporate governance structure to ensure that they are efficiently run. Good governance could be seen more as a mentality than an actual set process it is more to do with how the company portrays itself to the public, the investors and to its staff. It is needed in all sizes of organisations.

“Good corporate governance is running the company on behalf of the shareholders and other stakeholders.” – Chris Jackson (2003),’Foreword’, Management Quarterly, Corporate Governance issue 21 (October) p.3.

        Corporate Governance relates strongly to directors duties which in the UK are partly regulated by legislation in The Companies Act 1985 and to from precedents set in common law these duties are split into three areas, fiduciary duties to shareholders, duties of skill and care and finally conflict of interest. As well as being regulated by statute and common law they are governed by the principles of corporate governance which are laid down in The Combined Code. Technically these principles are more conventions than they are legalities so do not need to be directly adhered to, however The Stock Exchange does require that companies adhere to The Combined Code and also that they state in their annual reports that they have adhered to it as well as stating what they have chosen not to follow and to give a reason for not doing. It’s obvious that to ensure that a company is run well it needs to be well structured and part of structuring a company is how it is governed; this in turn makes good governance a necessity for the success of a company. Good governance can be classed as many things from form filling to conforming to shareholder needs and following The Combined Code but in short it is the running of a company ‘properley’ making sure that business is met not just equitably but also ethically. Even in cases where it is not required by law or preferred by The Stock Exchange it is needed to ensure the confidence of stakeholders and shareholders. Good governance is crucial for a company to succeed in the future.

        The need for corporate governance is highlighted by the corporate failures seen in the 1970s 1980s and 1990s such as Leeson bringing down Barings bank, Maxwell helping himself to the pension funds, the collapse of Polly Peck and Tiny Rowland running Lonrho as though it was his own. Examples can also be seen across the water in the US with the collapse of Enron. All these cases helped bring focus on the topic of corporate governance the result of this focus was The Cadbury Report which included the code of best practice. This code set out guidelines for the board of directors, non-executive directors and executive directors to follow as well as giving guidelines on reporting and controls. It became a requirement from the 30 June 1993 that all listed companies stated their compliance with this code in their company reports and where there was no compliance they had to state why.

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        The Cadbury Report combined with Hampel and Greenbury led to the publication of The Combined Code which set principles of good governance and details of relevant disclosures. The Combined Code was published in 1998 by the Hampel Committee, the code covers a range of best practice issues including issues such as the length of directors contracts, reporting and voting on remuneration and the independence of remuneration committees, the roles of chairmen and chief executives, the proportion of non executives and many other matters. The Combined Code is compulsory for all UK listed companies however compliance with the principles is not ...

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