Different Perspectives on Corporate Governance

Different Perspectives on Corporate Governance
2020-12-10

Professor John Paterson presents the sixth contribution to the  Centre for Commercial Law (CCL)’s blog series on “Seeing Commercial Law from Different Perspectives.” This series was launched to celebrate the University of Aberdeen’s 525 anniversary and to showcase CCL members thought-provoking standpoints on researching, teaching, or practising commercial law. John joined the University of Aberdeen in 2004 and was appointed Professor of Law in August 2011. He was the Acting Head of School from 2011 to 2012 and the Vice Principal for Internationalisation from 2016 to 2018. John’s research and teaching interests include systems theory, the regulation of risk, governance in the European Union, corporate governance and energy law.

“Corporate Governance has practically been defined by two different perspectives. Since E Merrick Dodd and Adolf Berle published differing responses to the question “for whom are corporate managers trustees?” in the 1930s, some (following Berle) consider that the company should be run in the interests of shareholders alone whilst others (following Dodd) contend that it should be run in the interests of the wider community. Since the Companies Act 2006, the statutory duty of directors in the United Kingdom has been to promote the success of the company, for the benefit of the shareholders, whilst having regard to other stakeholder interests. For some this is a pragmatic approach which recognises the residual risk run by shareholders (who do not have contractual protections in the way that employees or suppliers do) whilst for others the interests of other stakeholders need greater consideration. Related issues arise when we consider the Corporate Governance Code applying to companies listed on the London Stock Exchange. These companies do not have to comply with the best practice principles it contains, but if they do not, they have to explain why. These explanations are supposed to be monitored by institutional shareholders, but certainly before and during the financial crisis of 2008 there was evidence that they often took little interest in corporate governance provided companies were (apparently) performing well financially. Does this mean that focusing attention on the relationship between directors and shareholders is bound to end in trouble? The experience of the global financial crisis would certainly suggest as much. But have lessons been learned? Does the recent upsurge in interest in environmental, social and governance (ESG) investing indicate that large shareholders now understand that they do need to worry about the extent to which directors genuinely are having regard to other stakeholders? It might be too early to draw firm conclusions, but the debate between the two key perspectives on corporate governance appears to be entering an intriguing and extremely important new phase.”

The next contribution to this series by Professor Derek Auchie is titled “The Substance of Process: A Shift in Emphasis?”

Published by School of Law, University of Aberdeen

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