Food for Thought

• Date: 01 May 2016
• Published date: 01 May 2016
• DOI: http://doi.org/10.1002/bl.30048

6 BOARD LEADERSHIP

is sometimes called a path-dependent

response, that is, one in which the

response to a similar problem results in

different policy response, reflecting the

different jurisdictions’ existing institu-

tional frameworks and cultures.

In the case of Britain, the passing

of limited liability was followed by

fifty years of legal confusion about

the meaning of the act.6 This was only

resolved by the House of Lords judg-

ment in 1897 in Salomon vs. Salomon.

The burden of the judgment was to

make clear, finally, that the company

was an entity separate from the share-

holders—a ruling with profound impli-

cations for corporate governance and

the concept of shareholder ownership.7

Elsewhere, views on the matter were

different. In German and Nordic juris-

dictions the reaction of legislators was

different. In those jurisdictions there was

an early and very insightful recognition

of something later to emerge in English

academic literature as the agent/principal

problem. In Anglo-American jurisdictions,

Berle and Means8 in their seminal work

on the corporation identified a problem

that was everywhere apparent in the case

of publicly listed corporations (i.e., those

trading on stock exchanges). In summary,

they concluded that as shareholders

became detached from the corporation,

managers became increasingly indifferent

to their interests and wishes. This had the

effect of creating a new tension in Anglo-

American corporate governance—

unresolved to this day. Company direc-

tors and top management are increas-

ingly disconnected from shareholders

in whatever form. This event seriously

undermines corporate legitimacy, leav-

ing the corporation with no credible evi-

dence of ownership or accountability.

Independent Supervision

as an Alternative

In Northern European jurisdictions,

things evolved differently. Spotting

the ownership tensions that might well

arise where larger limited liability cor-

porations were concerned, legislators

in Northern European jurisdictions put

in place conditions that would preserve

the aggregate nature of the corpora-

tion.9 This required larger corporations

to create constitutionally separate

supervisory boards. These boards

would represent the interests of share-

holders and other key stakeholders

like employees. It would also, at arm’s

length, oversee the activities of the

board of management, comprising the

senior executive directors of the com-

pany. In short, the supervisory board

would supervise the executive directors

who run the business and ensure the

social accountability of the enterprise.

In Anglo-American jurisdictions, the

response has been different. Following

the total collapse of Enron, among oth-

ers, in 2002 amid evidence of systemic

fraud within the corporation industry,

self-regulatory groups10 have favored the

appointment of an increasing number

of nonexecutive directors (NEDs) with

the objective of strengthening corporate

governance.11 These NEDs are selected

and appointed by senior board members.

The NEDs sit on the same board—an

organ of the everyday running of the

company. The verdict on performance to

date is that NEDs lack the power and the

institutional independence to supervise

the activities of the executive directors.

Yet there is no willingness to change the

fundamental power structure of corpora-

tions. The situation, as a result, worsens

progressively.

The Case for Reform

Given the dysfunctional way in which

publicly traded corporations operate in

Anglo-American jurisdictions there is a

clear case for reform. Reform needs to

address the following interconnected

issues:

•Corporations above a specified

size should be required to create

constitutionally independent

supervisory boards to ensure that

the interests of shareholders and

other key stakeholders are fully and

effectively represented.

•Membership of the board should

be determined by the legitimate

groups representing the interest of

all relevant stakeholders by agreed

transparent processes.

•Directors’ duties shall be redefined

to reflect members’ supervisory

duties, ensuring that all directors

appointed are held clearly

responsible—joint and severally—in

law for the responsible stewardship

of the company by the executive

directors of the corporation who are

answerable to them.

•The Supervisory Board shall from

its membership elect a Chair

person and other officers to

perform specific supervisory tasks.

It shall also determine the terms

and conditions of directors of the

Supervisory Board and all matters

“The culture of blame is a

major barrier to the openness

required if sentinel events

are to be reported, lessons

learned and safety improved.

The system of clinical

negligence is part of this

culture of blame. It should

be abolished. It should be

replaced by effective systems

for identifying, analysing,

learning from and preventing

errors and other sentinel

events.”

The Report of the Public Inquiry

into children’s heart surgery at the

Bristol Royal Infirmary 1984–1995:

Learning from Bristol (Cm 5207).

The Stationery Office. July 2001.

http://webarchive.nationalarchives.

gov.uk/+/www.dh.gov.uk/en/

Publicationsandstatistics/Publications/

PublicationsPolicyAndGuidance/

DH_4005620

FOOD FOR THOUGHT

(continued on page 8)