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The separation of ownership and control is the concept that shareholders have little to no say in a company’s business, this separation usually happens in publicly held corporations. This essay will aim to define and discuss the different roles, duties and rights that both shareholders and directors have, and whether the statement given is true. A discussion of whether boards put their own interest first, before those of the shareholders. This paper will also look at the meaning of corporate governance and how it relates to the separation of ownership and control.

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Shareholders in a company are those who support a company financially by buying shares from it, shareholders therefore can vote on whether they want to remove one or more of the companies’ directors from their poison, shareholders in this case have a major power over a company if they had majority voting. Companies hire directors to look over the day to day operations of the business and what is in the companies’ best interest, this is in the majority of cases but there can be a few cases which do not work this way.

A focus has been shed in the early 1990s to corporate governance, especially in the United Kingdom’s listed companies, the Cadbury committee on the financial aspects of corporate governance published its last report in 1992, it shed a light on the responsibilities of directors, both executive and non-executive, auditors’ principal responsibilities, link between shareholders, the board and auditors amongst other things. It also contained a code of practice that companies that are listed in the UK should comply with. 

Fast forward to 1995, a committee called the Hampel committee was formed under the chairmanship of Sir Ronald Hampel. the committee asked to review the Cadbury code and how it was implemented, and if they were implemented correctly, and to amend it if necessary. The committee also reviewed the roles of directors and addressed the roles of shareholders and auditors in relation to corporate governance. A few years later, in 1998 the committee had published their last report in which they gave a code of compliance for companies that are listed. Fast forward to 1999, the Turnbull committee published a report, that was endorsed by the London Stock Exchange, that sets out how listed companies’ directors should comply with the code. In 2003  a new code that replaced the combined code issued by Hampel committee, The Walker Report from 2009 entailed more revisions to the code that were recommended by the Financial Reporting Council (FRC) and were incorporated in the UK Corporate Governance Code of 2014, this is the latest version of the regulations on corporate governance added to the living rules while it has not been changed much since 2003.   

In a corporation, s.172 of the Companies Act 2006 states that directors must uphold the benefits of the company first, which means, the benefit of the shareholders is supposed to be held by that rule as well. This means that it is hard for directors, especially non executive directors to put theirs interests first.

The idea of shareholders controlling what a director would do to a company has seen a change as in recent times with the open stock market, a shareholder would be geographically anywhere, although a general meeting can be held by any means of telecommunications i.e telephone, online video conference and so on as long as you can hear the shareholder clearly. It would make it hard for shareholders to feasibly control a company, this would make it in theory easier for directors to put their benefits in at first and the interests of a shareholder second 

A director must act in good faith and to promote a companies’ success as set in the Companies Act 2006, if a director would put his interest first, this would technically count as a conflict of interest, and as section 175 of the CA 2006, directors must avoid such thing as this would render the act to be a civil and maybe even criminal act. A director gaining personal profit from selling company information and profiting from self dealing or even profiting from third parties, it might be considered as bribery and insider trading which is illegal in the UK and almost everywhere in the worlds if that matters. We will look at the case of Aberdeen Rly Co v Blaikie Bros as an example of this as the case is mainly concerned with self-dealing, which is one of the main points that we are going to deal with in this essay as it is considered a benefit for a director and not for a corporation as whole, though the case is old and goes back to 1854 it is still a good example of what would be the new law that comes after it, s177 in particular which states that a director must state his interest in a transaction to the board and s239 which states that a director may not vote in said transaction, but in this case the director at question did both.

Shareholders tend to have more of rights than there are in duties, rights that must not be disregarded by the directors, as they can effectively remove or appoint a director or an auditor in the general meeting off a company. Shareholders can also bring an action against a director. In cases where, subject to the approval of the court, a claim on behalf of a company on the basis of negligence and breach of duty and/or trust. Personal causes that a shareholder might have against a director is also a valid reason to take action . In some circumstances, where a director cannot fulfil his or her duties and consequently breached the company’s constitution, a director’s duty also cannot be excluded or limited for what is above. i.e negligence or in the case of this essay, self-dealing.

Self-dealing, as it is defined in the context of company law as the action of a director in which they put their advantage of their status, as a director and acting in their own interests, self-dealing is considered to be a conflict of interest, and as s.175 of the CA 2006 states, directors must avoid it. The law in this case is considered to be a way in which a director is discouraged, nay, prohibited by law from putting his or her interests as a priority, thus tilting the balance of powers, if not slightly to favour the interests of the shareholders.

On one hand directors control the the day-to-day runnings of a company, which in hindsight makes one believe that they have the ultimate power and they can do as they please. But it is the shareholders who have the ultimate power. If they find that a director is not seeing the full potential of the company, or that he or she is illegally handling any business like for example self-dealing, they can fire said director. although most companies give power to the directors to basically control the company from the fine details, up to the big decisions, although again they usually have to seek the approval of the shareholders majority first. Companies usually do not have any article of association to restrict directors, which is usually not a bad thing, but it also gives a slight shift to give the directors more power though it is not exceeding that of a shareholder. In other words, unless the articles of association says so, a director has an ultimate decision making power, thus we have separation of directorship and shareholding in a company.

In the UK model, shareholders are the owners of the company, as they are the ones who have “bought it” thus they have the ultimate saying in a company. However, in other countries the stakeholder model is set, where everyone who is involved in the company’s business are at stake. Thus everyone including but not limited to shareholder, directors and even employees can push their own agenda to ultimately benefit the company. This is because with the stakeholders model everyone of whom we mentioned above is benefiting from a company’s success, thus it is unlike the shareholder model, it merges everyone without making anyone left out or thinking about their own personal gain, because at the end everyone would be benefiting from the success of the company.

In the past years the courts held in the case of Eclairs Group Limited v JKX Oil & Gas Plc, where the shareholders were denied to vote in a general meeting. The Supreme Court held that it was an improper use of power that the directors acted upon, where the balance of powers shifted unlawfully to the directors side without the shareholders’ consent. The company has given its directors to act on behalf of the shareholders for the success of the company, thus separating the shareholders from the directors totally, i.e the shareholders have ownership of the company but virtually no control over it. Both the directors and shareholders would want the success of the company in this case, even if the shareholders were just, and pardon my expression-, money bags in the eyes of the company, meaning they, just pay us, the directors, and we will do the rest, this is called Disenfranchisement of the shareholders, or taking the right to vote from shareholders. However, in this case the minority shareholders who own 39 per cent of the company, who in this case, if given the right to vote, would have removed some of the board members by voting against their re-elections and also voted against a special resolution that would raise the company’s capital by issue and allotment of shares. with said disenfranchised votes the claim to raise the capital would have not see the light of day. The disenfranchised shareholders did not claim that the directors were not acting in good faith, nor not to promote the company’s success, but merely that the fact that they have gone beyond their powers. 

Having a company run by skilled professional managers is vital for a successful company growth, as it demands a different set of skills to operate it effortlessly. In other words, company owners may not necessarily have the needed dexterity to fit in the shoes of a professional manager, separating ownership from control endows a company to run by skilled professionals as a team, for example, directors in marketing, public financing and public relations.

Separating personal and business assets and liabilities tend to be difficult if one is both the director and an owner of a company as they may mix up together. Having a separation of ownership and control may solve this merger and utilise a company’s capital swiftly to earn shareholders higher profits. Having separation of ownership and control also makes it easier to get a spot on performance appraisal, finding what works well for the company and spotting the flaws and improving them making it easier to reach maximum potential of profits and minimising the losses. The directors can evaluate with objectiveness that a company owner might lack separating ownership and control may lead to disconnection between owners and directors which may lead into miscommunications that may lead to assumptions. This is considered disadvantageous for a company as it may lead into losses of earnings.

But on the other hand, it is very costly and high in maintenance to keep a separation, a corporation must have annual meetings for both shareholders and directors, they also must stick with corporation formalities which take previous time, owners must sign all documents related to the company .

As defined by a report by the Cadbury committee in 1992 is “the system by which companies are directed and controlled”  branched into two sections, board of directors and  shareholders, the latter usually is called “shareholders in general meeting” because decisions concerning the company are usually held in a general meeting by the shareholders as the name suggests. In large companies in the UK, ownership and control are usually separated, this is to prevent those who manage the company from running the company for their own benefit rather than the benefit of the shareholders.
This is emphasised in companies with a large number of shareholders with not one person owning a majority of the shares, in other words, dispersed ownership. shareholders usually, and almost always seek financial gain, they are not typically interested in managing a company. In these companies, legal protection that has to do with the balance of powers between shareholders and directors has little to no outcome because shareholders rarely use the powers given to them, thus we have separation. This rises the peril of directors going rouge and using the company for their own personal gain instead of promoting the success of the company. This explains why the corporate governance is more advanced for listed companies than for companies that are private and or are unlisted public, it also justifies why most of the law that has to do with it is not found in company law, but in securities law.

The UK corporate governance code gives an excellent practice for the directors of companies that are premium listed and have shares in the London Stock Exchange on the issues like risk magnet, director remuneration, relations with shareholders’ board compositions and composition and effectiveness, the code usually renewed every two years.

To enhance quality of management, the UK has a newer stewardship code that has the purpose of monitoring the quality of engagement between asset managers and companies they have invested with. It gives a good example on how engagement with companies should be like, and to which mangers  are supposed to aspire to become and to give a hand in explaining how good governance responsibilities should look like. However, the stewardship code, unlike corporate governance code, companies are not legally binding to it. Directors are put in a company on the basis that they will be the edge the driving force of the company, avoiding any shareholder from using the company in their own interests, that is why they are hired in the first place. thus, directors are governed by their fiduciary duties. this is illustrated in the case of York Building Co v MacKenzie (1795) which in essence says that one cannot be entrusted with a business and then makes it the way that benefits himself. When individuals are interested with properties of others, it is forcible that that person would be competent to do so in the best way possible, English civil law protects those rights by establishing a standards of conscious.

On the other hand, judges have shown little to no interest on the case of managerial incompetence, they also have not made it to be their duty to define what could be considered ‘good management’ as they did not see their selves fit to give that definition, as if they did, they would have to make judgments based on the reasonable standard of business decisions, and that would be very controversial indeed. It is only recently that the courts have made an arguably meaningful meaning to what are the management duties of a director are, and that basically requires the directors to arrive at a decision in a cognitive process rather than reviewing the substance of those decisions.

Finally, we come to the UK Corporate Governance Code which is trying to ensure that directors have to have transparency regarding the shareholders and mutual understanding between them and the board of directors. It also tries to keep the directors in touch with the shareholders and them to be aware of their concerns. It is in way trying to create some sort of balance of powers between the directors and shareholders  

In conclusion, we can say that this essay has explained what are the roles, duties and right of both directors and shareholders, what is the separation of control and ownership, and have reached the conclusion that separating the control from ownership can be very beneficial for a company if done right. This means that if a directors was seeking the good of the company and promoting its success. The law has put safeguards in place to try and prevent the misuse of powers given to directors, by obliging them to honour their fiduciary duties towards the shareholders, and by so we can say that the statement given to discuss could be leaning more towards falsity than being true. It will not put an incentive on directors to look after their own interest, but quite the contrary, by stopping shareholders from misusing the company to pursue their own gain.

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