The UK response to corporate governance
Divergence Of Interests
The objective of this paper is to explore the adequacy of the UK response to corporate governance by examining the relationship between the various factions within a company. Corporate governance essentially concerns the reconciliation of interests between the owners (shareholders) and the operators (management) of a company. By the dawn of the 20th Century, the board of directors were being perceived as an independent organ of the company rather than as mere agents of the shareholders who acted on their instructions. A further divergence of interests resulted from the increased trade of publically listed companies, resulting in further geographical spread of shareholders whose shares were likely to be smaller. This made the link between ownership and management more remote and harder to govern. Varying share sizes also meant that an inequality of voting rights between shareholders presented further problems, which are not present in company structures where the ownership and control are vested in the same people.
This separation of shareholders (owners), from the management (directors), resulted in what has been dubbed the ‘agency problem'. The directors of the company are managers of the shareholders' capital, rather than their own; this therefore presents an obvious threat to shareholder's interests, since directors may well act in their own interests and not that of the shareholders. Berle and Means observed that as the number of PLC's grew and their shareholders became increasingly geographically, economically and characteristically diverse; the separation between ownership and management intensified and power shifted towards directors. This power was sometimes abused.
Part of the UK's legislative response to this problem was through s172 of the Companies Act 2006, which obliges directors to