In 1998 the Department of Trade and Industry announced an independent review of company law. It will not be published until 2001. Nevertheless, recent recommendations from the Law Commission point to a modernisation of the law, in keeping with changes being introduced in other areas.
The list of corporate scandals to have hit the headlines over the last decade is all too familiar: Maxwell, BCCI, Barings, Guinness, Polly Peck. Various civil, criminal and regulatory proceedings have followed, some with greater success than others.
The list of committees appointed to report on corporate matters is equally familiar. The Cadbury Committee investigated corporate collapse and fraud. The Greenbury Committee examined the excessive remuneration of officers. The Hampel Committee examined the implementation of the findings of earlier committees.
The Government's review
Last year, the Government announced a wide-ranging review of company law and published its consultative document, Modern Company Law for a Competitive Economy. This proposed that the recommendations made by the Hampel, Cadbury and Greenbury reports be combined into a single set of principles and code of practice.
The aim is to achieve the goal of best practice without the need for legislation. The underlying threat is that, if the goal is not met, legislation will be enacted, which is more stringent that the goals currently set.
The Stock Exchange has adopted the combined code. It remains to be seen whether this will have the desired effect. The aim of the Government's review is to reduce complexity, remove obsolete provisions and remedy defects with a view to modernising company law. The emphasis is to be on transparency and accountability.
A lengthy timetable was set for the review. The steering group carrying out the review published its first consultation document in February 1999 and three further consultation documents in October 1999. A White Paper is not expected until 2001 and there will be no legislation until the next parliament. This allows time for the review to be thorough and for the Government to see whether UK companies follow best practice on questions of corporate governance.
The second phase working groups will address the stakeholder issue and the role of directors, including insurance. One option for review is whether insurance should be compulsory for directors. The argument for compulsory directors and officers insurance was given a boost recently, by comments made by the Vice Chancellor, Sir Richard Scott in a speech. Sir Richard has voiced his suspicions that a number of directors admit their unfitness to act as a director due to fear of the costs of defending disqualification proceedings.
Against this background, the Law Commission is publishing its recommendations for the company law review. The Commission has recommended that the unfair prejudice remedy available to shareholders whose rights have been affected is to be simplified and the procedure streamlined to reduce costs. It also proposes that the derivative action, which allows a shareholder to sue directors to obtain compensation for the company, should be rewritten in a modern and accessible form.
In line with changes seen under the reform of civil procedure, the Commission recommends that shareholders be directed towards alternative dispute resolution procedures to resolve their grievances.
The Law Commission's most recent recommendation is that there should be a statutory statement of the principal duties owed by a director to a company.
The Commission proposes that the Insolvency Act Model should be followed so that the duty of skill and care will involve a dual test. The first part is objective and will depend on the general knowledge, skill and experience possessed by the relevant director.
The aims of the Government and the Law Commission are clear. Corporate governance has to improve, best practice must be followed. Shareholders' rights to enforce the duties of directors are to be more readily available and more understandable.
A clear statutory statement of the duties of a director will ensure that both directors and shareholders are aware of those duties. Modern language will be used, procedures simplified and streamlined to keep costs down, and parties are to be encouraged to resolve disputes outside the courts.
Directors and officers insurance may assist the modernisation process. If such cover is made compulsory or its take-up encouraged, this should provide support to the modernisation process.
Directors would be brought in line with many of today's other professionals. Third parties with genuine grievances would receive valuable protection. Companies and their directors would be in a position to defend unmeritorious claims and charges.
Will we see a modern company review? We await the government's review with interest.