To all those reading this I am David Gibbs; I am a Lecturer in Law at the University of East Anglia.

I created this blog as a general out-let of ideas for my research, as well as keeping those interested up-to-date on my research and general interests.

I completed my PhD thesis at the University of East Anglia in 2014. The thesis was recommended for the award of PhD with no corrections. My external examiner was Prof. Simon Deakin (Cambridge) and internal examiner was Prof. Morten Hviid.
My PhD research centred on directors' duties and company law. The thesis was titled 'Non-Executive Self-Interest: Fiduciary Duties and Corporate Governance'. It was a doctrinal and empirical study on whether self-interest was suitably controlled amongst non-executive directors.

My supervisors were Prof. Mathias Siems, Prof. Duncan Sheehan, Dr. Sara Connolly and Dr. Rob Heywood

All opinions of any existing or future blogpost are my own. They do not necessarily represent the views of any of my associated institutions.
ORCID 0000-0002-6596-8536

Wednesday, 28 September 2011

A catalyst for change: Causes for non-executive majority on boards

From a plethora of academic articles on non-executives one could easily draw some general observations:

1) Non-executives emerged due to the need for there to be a body of supervision in the company.

2) Their role and responsibilities have increased largely in response to company malpractice and recessions where we see numerous reports aimed at improving corporate governance.

3) As well as supervising, non-executives are also recognised for providing a strategic function

Research on non-executives has largely been dominated by agency theory as non-executives serve to control management. As Sir David Walker demonstrated, the argument goes that even though two thirds of equity capital is now in the hands of the institutions that should have enough clout to look after themselves; they are in fact frequently reluctant for fear of adverse publicity. Thus responsibility must fall on the non-executives who have the knowledge and power to act.

Thus, when corporate misfeasance came to light it is generally assumed that non-executives could not exercise enough control in the corporate governance framework. As a result Governance Codes are revised and reports produced to place more emphasis on the monitoring of the management.

It appears then that it is generally assumed the cause of boards being non-executives in the majority has been a response to corporate misfeasance based on agency theory.

However, there appears to be strong evidence out there that suggests revisions of Codes and Reports do little to alter the nature of the non-executive director. One would argue the primary reason behind their prominence on company boards today was a result of a number of factors such as technological advancements and deregulation that created a wider need for non-executives beyond that of monitoring, and caused companies to view non-executives as of use rather than with scepticism. Thus, the strategic function served as a catalyst for non-executives to emerge on boards in the majority.

It was in 1945 that the Cohen Report was published. It identified that there was not an active body of supervision within the company and suggested different methods of supervision. Today we can see that the body of supervision is the non-executives directors.

However, by 1972 a study by the British Institute of Management revealed that non-executives were rare and were mainly appointed because of connections. The position was viewed as a "job for the boys" and they were effectively "yes men" on decisions already decided. Fast-forward to 1986 and only 6% of top companies lacked non-executives and on 20% of those boards, non-executives were in the majority.

During this time the UK had joined the European Union in 1973 and during this period there were significant developments in the reduction of trade barriers. There were also developments in technology and the ultra vires rule (that companies could not act beyond what they set out to do, as it were) had continued its decline in significance evidenced in some part by the Companies Act 1985.

All these events allowed businesses to expand in to different markets more freely as well as in to different sectors. The requirement for knowledgeable people to facilitate this expansion was apparent. ICI was noted for appointing a prominent Japanese business man to its board as non-executive for the primary purpose of helping them expand in one of its most important markets Japan. Without the knowledge and experience of these people, survival would not have been likely.

So whilst the need for monitoring was greeted with scepticism, non-executives were welcomed with open arms when it came to facilitating expansion. Companies are unlikely to do something, such as appoint non-executives, if they have no legal requirement or benefit in doing so.

It is not to say that the monitoring role has not played a small part in the increase in their numbers. Legal rules and Listing Rules have changed to urge companies to appoint non-executives. The standard of their conduct has also altered culminating in s174 of the Companies Act 2006. However, the change in legal standard came around in 1986 and again was probably a result of their increased responsibility in strategic matters rather than a response to monitoring, although it may have appeared that way.  

Thus, it must cast serious doubt over agency conceptions that non-executives can enhance performance through monitoring of management. Any enhanced performance may be down to strategic advancement by appointing the right non-executives and this moves us closer to views established by Resource Dependence Theory. One suspects most appointments are made with the view of enhancing the company through strategic advice. Decisions predominately based on their ability to monitor are probably rare.

However, as the law recognised non-executives increased involvement, they must now be active monitors rather than passive "yes men" and the need to monitor is of much more importance to non-executives due to fear of liability.  

Thursday, 22 September 2011

Hydrodan (Corby) Ltd, Re v. Hydrodam (Corby) Ltd, Re and functions of de facto directors

Possibly one of the greatest mysteries of UK company law... or may be not I am just trying to find out the answer to whether this case should be referred to as Hydrodan or Hydrodam.

It seems in the majority of circumstances the [1994] 2 BCLC 180 citation is cited as Hydrodam; whereas the [1994] BCC 161 citation is cited as Hydrodan.

So what is the answer? Here are a number of sources I have looked at to discover the answer.

Westlaw cites both in fact. It says Hydrodan... also known as Hydrodam. Pretty useless in helping discover the answer. Clicking on the link to the BCC citation it is titled as Hydrodan however.

So I regard that as 1 for Hydrodan (1-0)

Recent cases
Holland [2010] UKSC 51. A Supreme Court decision refers to it as Hydrodam. The decision in Mumtaz, Re [2011] EWCA Civ 610, a Court of Appeal decision, also refers to it as Hydrodam

So 1 to Hydrodam (1-1)

Leading company law text books
The leading company law textbook Gower and Davies 8th edn refers to it as Hydrodan as which the litigation commenced but provides sub. nom. as Hydrodam indicating Hydrodan was incorrect at commencement of litigation or something was erroneous. Thus litigation continued under Hydrodam but started as Hydrodan.

Newer Company Law books such as Hannigan merely refer to it as Hydrodam

I would say 1 a piece for this source (2-2)

The Times
See here for report. On its report of a recent decision Gemma Ltd, Re [2008] BCC 812 they also refer to it as Hydrodam.

1 for Hydrodam (2-3)

Against by better judgment I also looked at Wikipedia. The "informed author" approves with Hydrodam and says it is often cited incorrectly as Hydrodan.

Although I have looked at Wikipedia I think support here would be more like an own goal rather than support for one or the other. So I award no points to either side.

On this assessment I would conclude that Hydrodam is to be considered the best way to cite. It appears to be in the majority of cases - two to three - to be cited as Hydrodam. The main textbook also distinguishes that litigation continued under Hydrodam although it was originally Hydrodan. Thus, unlike Wikipedia, I would not class it as incorrect to call it Hydrodan. To be on the safe side I will probably cite both - so anyone reading this that has come up against the same trivial point you could just cite the following:

Hydrodan (Corby) Ltd, Re; sub. nom. Hydrodam (Corby) Ltd, Re [1994] BCC 161

The case itself
For those wondering, the case concerned de facto directors. Millet J distinguished between shadow directors and de facto directors (however it is argued that difference has now potentially disappeared - see Holland [2010] UKSC 51 at [91]) and was one of the initial cases to recognise that an individual could be recognised as a director for certain statutory provisions, even though never appointed. Previously the doctrine of de facto directors only encompassed those appointed but there was some defect (see Canadian Land Reclaiming and Colonizing Co, Re (1880) LR 14 Ch D 660) in that appointment;  and those who had ceased to be directors (see New Par Consols Ltd, Re [1898] 1 QB 573). Since certain provisions in the Companies Act were only applicable to directors, the courts extended the concept of de facto directors to those not appointed at all to ensure people could not obtain the position of director without incurring responsibility for any misfeasance or breach of duty. What is necessary to show is that they assumed the status and functions of a director. Although what factors are to be considered in deciding whether an individual has assumed the status and functions, it is opined that one must perform the functions to assume the status. Simply holding yourself out as a director, thus assuming the status, is a test that has been rejected by the courts in determining de facto directorship of those never appointed (see for example Tjolle [1998] 2 BCC 282).

These functions can be varied and may include behaviour as well as performing tasks. Whether these functions are to be considered as those only performed by directors is open to debate. Jacobs J in the case of Tjolle [1998] 2 BCC 282 stated that there would be no justification in making someone liable over actions which they had no control over. A similar position was taken in Lo-Line, Re [1988] Ch 477 where Browne-Wilkinson VC held that based on the wording of section 300 of the Companies Act 1985 that only conduct "as director" could be considered when deciding to disqualify an individual.

The view that is only the conduct as director that should be considered is supported by academic articles by De Lacy 'The concept of a company director' (2006) JBL 267; and Watson 'The significance of the powers of boards of directors in UK company law' (2011) JBL 597. De Lacy states that poor conduct in relation to the management of the company is different from poor conduct as director. Watson also argues that if directors' and managers' functions were the same then the law would not need to distinguish between the two.

Thus in determining de facto directorship it is argued that functions only attributed to a director should be considered.

However, modern developments have looked to whether the individual had a "real influence over the corporate governance structure" (see for example Mea Corpn Ltd, Re [2006] EWHC 1846 (Ch)). Although Lord Collins in Holland at [91] believed this was just as difficult to determine as what can only be attributed to a director, it appears far more inclusive. It would seem to encompass not only functions attributable to directors, but functions directors normally perform as well, i.e. external business with third parties.

This second approach would appear to be more in keeping with the idea of preventing people assuming the position of directorship without the responsibility. However, it would still require them to perform some functions that are only attributable to directors. One cannot ignore Browne-Wilkinson VC and Jacob J who remind us that you cannot find someone responsible for actions they had no control over.

Wednesday, 14 September 2011

Holland [2010] UKSC 51: Extracting a rationale for determining de facto directors

Last year the Supreme Court passed down its judgment on a matter regarding de facto directors.

De facto directors are those who were either appointed defectively or were not appointed at all. Holland deals with this latter type of de facto director in trying to address when one can be classed as a de facto director.

To give a simplified version of the facts Mr Holland was part of a group of companies. He was a sole de jure director (formally appointed) of one of the companies. That company itself was a sole de jure director (corporate director) of a composite company - something which is now unlawful under s155 Companies Act 2006 which requires one human director, but events here happened pre-2006 and sole corporate directors were perfectly lawful since the decision in Bulawayo Market and Office Co Ltd [1907] 2 Ch 458.

Her Majesty's Revenue and Custom brought a claim against Mr Holland trying to make him liable for breach of fiduciary duty under s212 of the Insolvency Act. They claimed he was in breach of duty and misfeasance for causing the unlawful payment of dividends to shareholders when the composite company did not have sufficient reserves to pay its creditors, which is unlawful under what is now s830 CA 2006. Since s212 only applies to directors, and Mr Holland was only a de jure director of the corporate director, HMRC tried to claim Mr Holland was ultimately a de facto director of the composite company.

It was held that Mr Holland was not a de facto director as it was demonstrated that he was merely discharging his duties as de jure director of the corporate director. The judgment focused primarily on how one can determine a de facto director. Lord Collins provided a precedent based line of reasoning showing that one has to assume the status and functions of a director. This was supported by Lord Hope.

Watts however wrote that Lord Collins' precedent line of reasoning fails to furnish a rationale. He states that there can be aberrations in precedent-based argument, as counsel or judge will not grasp the principles. However, it is submitted, with respect, that Watts has failed to grasp the thrust of the case and Lord Collins is, at points, at pains to stress his rationale, which in fact had little to do with how you determine who is a de facto director.

To elaborate further, modern case law on de facto directors has developed to include not only those with a defective appointment but also those never appointed at all (see Lo-Line Electric Motors Ltd, Re [1988] Ch 477). Although people have attempted to devise specific tests, determining who a de facto director is has been decided on a factual basis. A judge must ask themselves whether an individual has assumed the status and functions of a director. This may include looking at whether one has held themselves out as a director; whether they are on equal footing with the other directors; or if they have "real influence" in the corporate governance structure. Thus for Mr Holland to be a de facto director of the composite company he would have had to assume the status and functions of a director in that composite company. However, it had already been accepted that this was not the contentious issue in the case. It was clear that Mr Holland had merely been discharging his duties as a de jure director of the corporate director.

The question for Lord Collins (at [96]) then was not whether Mr Holland had assumed the status and functions of a de facto director but whether an 'individual director who made all the significant decisions of a corporate director is to be regarded as being taken as if they were directors of the company of which it is the corporate director'. To put it another way could the judicial extension of de facto directors to include those not appointed at all encompass an individual director of a corporate director? He answered in the negative.

Lord Collins provided three reasons (rationale) for why Mr Holland could not be a de facto director:
1) The rule in Foss v Harbottle - A company is its own separate legal personality and distinct from its directors

2) The company structure was perfectly legitimate - Since the decision in Bulawayo it has been possible for there to be individual corporate directors.

3) Legislative interference - in the form of s155. Lord Collins did not believe it was the place of the court to interfere. s155 was intended to insure that there could be at least one natural person for which responsibility could be attributed to. If Parliament wished to legislate there could be no corporate directors, or all directors be natural persons, it would have done so.

Thus, a factual assessment will still take place when trying to determine if someone is a de facto director. The case of Holland was merely an "incidental issue" as described by Lady Justice Arden in Mumtaz, Re [2011] EWCA Civ 610, which supported the 2008 decision in Gemma Ltd, Re [2008] BCC 812 both of which proceeded on a factual assessment. The notion suggested by Watts that Lord Collins distinguished between a factual assessment and whether one assumes the status and functions of a director holds no weight. They are one in the same.

To conclude Lord Collins did not need to provide a rationale on what was meant by assuming the status and functions as it was clear Mr Holland had not done so. Lord Collins was merely demonstrating that that is what is necessary for someone to be a de facto director and the concept could extend to those not appointed at all. However, extending de facto directors to include those serving as sole directors of individual corporate directors would be beyond the powers of the court and the law.

Watts' case comment can be found under the following citation: P Watts, 'De facto directors' (2011) 127 LQR 162

Contributor Spotlight on Lexis Nexis Blog Community

I am pleased to announce that my blog posts have resulted in me being added to the Lexis Nexis International & Foreign Law Blog Community contributor spotlight.

I hope to keep up with regular blog posts to keep my readership happy!

For a quick update I am currently doing the following:

1) Writing my chapter 3 - This is focusing on: Who is a director; What are director functions; When do fiduciary duties arise. This will hopefully result in providing insight as to when non-executives owe a conflict of interest duty

2) Preparing for the new year of teaching - This year I am involved in Company Law and Contract Law. There is also work in progress for preparing new classes for pastoral support for students which I am involved in.

3) Organising a careers seminar. In an attempt to improve employability of research students and transparency of what academic careers offer and involve.

Wednesday, 7 September 2011

Bartz firing and "group think": An apple is an apple no matter what you call it

As many of you may have read about this morning, Carol Bartz, CEO of Yahoo! Inc, was fired. A single instance of a female CEO being fired: But what can this potentially tell us about the phenomenon of "group-think"?

Group-think is a simple idea that those working closely together with similar characteristics from the same background will often fail to recognise external threats. Something that, in a corporate setting, is receiving a lot of attention where boardrooms are dominated by middle-aged white males. This has been touted as a possible failing of corporate governance that was a factor that lead to the events of 2008.

Chester Barnard, The Functions of the Executive, wrote in 1964, from his reprinted lectures from 1938, that:

'It must not be understood that the desired degree of compatibility is always the same or is the maximum possible. On the contrary it seems to me to be often the case that excessive compatibility or harmony is deleterious, resulting in "single track minds" and excessively crystallized attitudes and in the destruction of personal responsibility'

So, does having female or diverse representation on your board necessarily mean enhanced firm performance or help avoid catastrophe? From a purely subjective view I would have to say no. Distant investors may originally see such representation as an indicator of good corporate governance, but eventually people will realise a director is a director, just like a politician is a politician, no matter who they are. By focusing on corporate governance reforms as a way of reducing economic instability is purely a scapegoat from true causes: Lack of control and unfavourable directors' duties.

1) Lack of control - by this I mean from the law or parliament. Not from non-executives. Group-think solutions/hyperbole seem to suggest that if there were more diverse boards 2008 may never have happened. The truth is while interest rates and low cost borrowing could be driven to unstable levels, lenders would continue to try and undercut one another until that unstable level was reached. This leads to the second point of directors' duties

2) By this I mean mainly s172 - 'the duty to promote the success of the company'. This requires focus on the long term but also requires that you consider the interests of the shareholders/company as a whole effectively. Such was the economic climate any director who noticed problems before they happened in the economy/sector may be stuck in a catch 22 position. If they, as lenders, do not reduce lending prices they risk of losing customers etc and the total shareholder return/earnings per share reduces, which in turn reduces the director's bonus and even risk not being re-elected.

If they do reduce prices then the market becomes unstable and again bonuses are lost and directors ousted; or even worse being accused of not acting in accordance with s172 by focusing on the short term.

Further to s172, groupthink ignores that s172 can have an overriding element to that of personal views. Even if a board is diverse it does not necessarily mean a different course of action will be taken. A director has a duty to promote the success of the company, and this may conflict with their own views.

By having a diverse board wouldn't have been able to stop what was happening because if the market allows it, people will exploit it. Being male, female, young, old etc does not make you good at your job: Being good at your job makes you good at it.

Trying to predict where the next external threat to a sector or the economy as a whole will come from requires more than just robust corporate governance. Legislation at a national or even EU/international level is needed to stem "over-competitive" or harmful behaviour. However, one is aware of the arguments for and against legislative interference in the market.

*For those wondering I see the next collapse coming from social networking* - How many of us actually click adverts on Facebook? Not to mention the continuing presence of privacy...

As a disclaimer I fully support equality of access for board positions but assuming that the external threats can simply be overcome by having diverse people on the board is ignoring the bigger picture. It may be anecdotal but did Bartz improve Yahoo! by being female? No.

Anyway, that is my two pence worth...