Courtesy :Bachelors in business administration

Balance of power

Adolf Berle in The Modern Corporation and Private Property argued that the separation of control of companies from the investors who were meant to own them endangered the American economy and led to a mal-distribution of wealth.

The most important rules for corporate governance are those concerning the balance of power between the board of directors and the members of the company. Authority is given or “delegated” to the board to manage the company for the success of the investors. Certain specific decision rights are often reserved for shareholders, where their interests could be fundamentally affected. There are necessarily rules on when directors can be removed from office and replaced. To do that, meetings need to be called to vote on the issues. How easily the constitution can be amended and by whom necessarily affects the relations of power.

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It is a principle of corporate law that the directors of a company have the right to manage. This is expressed in statute in the DGCL, where §141(a) states,

(a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.

In Germany, §76 AktG says the same for the management board, while under §111 AktG the supervisory board’s role is stated to be to “oversee” (überwachen). In the United Kingdom, the right to manage is not laid down in law, but is found in Part.2 of the Model Articles. This means it is a default rule, which companies can opt out of (s.20 CA 2006) by reserving powers to members, although companies rarely do. UK law specifically reserves shareholders right and duty to approve “substantial non cash asset transactions” (s.190 CA 2006), which means those over 10% of company value, with a minimum of £5,000 and a maximum of £100,000. Similar rules, though much less stringent, exist in §271 DGCLand through case law in Germany under the so-called Holzmüller-Doktrin.

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Probably the most fundamental guarantee that directors will act in the members’ interests is that they can easily be sacked. During the Great Depression, two Harvard scholars, Adolf Berle and Gardiner Means wrote The Modern Corporation and Private Property, an attack on American law which failed to hold directors to account, and linked the growing power and autonomy of directors to the economic crisis. In the UK, the right of members to remove directors by a simple majority is assured under s.168 CA 2006 Moreover, Art.21 of the Model Articles requires a third of the board to put themselves up for re-election every year (in effect creating maximum three year terms). 10% of shareholders can demand a meeting any time, and 5% can if it has been a year since the last one (s.303 CA 2006). In Germany, where employee participation creates the need for greater boardroom stability, §84(3) AktG states that management board directors can only be removed by the supervisory board for an important reason (ein wichtiger Grund) though this can include a vote of no-confidence by the shareholders. Terms last for five years, unless 75% of shareholders vote otherwise. §122 AktG lets 10% of shareholders demand a meeting. In the US, Delaware lets directors enjoy considerable autonomy. §141(k) DGCL states that directors can be removed without any cause, unless the board is “classified”, meaning that directors only come up for re-appointment on different years. If the board is classified, then directors cannot be removed unless there is gross misconduct. Director’s autonomy from shareholders is seen further in §216 DGCL, which allows for plurality voting and §211(d) which states shareholder meetings can only be called if the constitution allows for it. The problem is that in America, directors usually choose where a company is incorporated and §242(b)(1) DGCL says any constitutional amendment requires a resolution by the directors. By contrast, constitutional amendments can be made at any time by 75% of shareholders in Germany (§179 AktG) and the UK (s.21 CA 2006).

Countries with co-determination employ the practice of workers of an enterprise having the right to vote for representatives on the board of directors in a company.^{[citation needed]}

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Director dutie

 Board of directors and Directors’ duties

In most jurisdictions, directors owe strict duties of good faith, as well as duties of care and skill, to safeguard the interests of the company and the members. In many developed countries outside the English speaking world, company boards are appointed as representatives of both shareholders and employees to “codetermine” company strategy. Corporate law is often divided into corporate governance (which concerns the various power relations within a corporation) and corporate finance (which concerns the rules on how capital is used). # ISO certification in India

Directors also owe strict duties not to permit any conflict of interest or conflict with their duty to act in the best interests of the company. This rule is so strictly enforced that, even where the conflict of interest or conflict of duty is purely hypothetical, the directors can be forced to disgorge all personal gains arising from it. In Aberdeen Ry v. Blaikie (1854) 1 Macq HL 461 Lord Cranworth stated in his judgment that,

“A corporate body can only act by agents, and it is, of course, the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting or which possibly may conflict, with the interests of those whom he is bound to protect… So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of the contract entered into…”

However, in many jurisdictions the members of the company are permitted to ratify transactions which would otherwise fall foul of this principle. It is also largely accepted in most jurisdictions that this principle should be capable of being abrogated in the company’s constitution.

The standard of skill and care that a director owes is usually described as acquiring and maintaining sufficient knowledge and understanding of the company’s business to enable him to properly discharge his duties. This duty enables the company to seek compensation from its director if it can be proved that a director has not shown reasonable skill or care which in turn has caused the company to incur a loss. In many jurisdictions, where a company continues to trade despite foreseeable bankruptcy, the directors can be forced to account for trading losses personally. Directors are also strictly charged to exercise their powers only for a proper purpose. For instance, were a director to issue a large number of new shares, not for the purposes of raising capital but in order to defeat a potential takeover bid, that would be an improper purpose.

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