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Scottish Law Commission (Discussion Papers)
You are here: BAILII >> Databases >> Scottish Law Commission >> Scottish Law Commission (Discussion Papers) >> Company Directors: Regulating Conflicts of Interests and Formulating a Statement of Duties [1998] SLC 105(16) (DP) (August 1998)
URL: http://www.bailii.org/scot/other/SLC/DP/1998/105(16).html
Cite as: [1998] SLC 105(16) (DP)
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Part 16
Section C Miscellaneous Matters
Part 16 Empirical Survey of Directors
Introduction
16.1 As we said above,[1] we intend to carry out an empirical survey as well as seeking the views of consultees by the publication of this Consultation Paper. The survey will be carried out in the consultation period and the results will be made known in and taken into account in the final report. The survey will be carried out by the ESRC Centre for Business Research at the University of Cambridge.
Empirical research
16.2 The analysis of economic considerations in Part 3 indicated a number of issues which would be appropriate for empirical research. Theoretical economic analysis suggests that company law may enhance efficiency by (amongst other things) reducing agency costs, facilitating bargaining between corporate actors, and reducing the effects of externalities (that is to say, the negative, unbargained-for effects of corporate transactions on third parties, such as creditors). Statutory regulation may, in principle, play a useful role in supplementing the general principles of fiduciary law, particularly by providing incentives for the disclosure of certain categories of information by senior managers to other board members and to shareholders.16.3 However, the efficiency of regulation in this area cannot be assessed unless more is known about how relations between the different corporate actors currently operate in practice. The central aim of empirical research should therefore be to clarify the precise nature of the relationship between shareholders and senior management. Empirical research should aim to build up a more complete picture of how relations between shareholders and managers operate, and, in particular, the role played by representatives of institutional shareholders and by non-executive directors. It will also be necessary to examine the types of relationships which exist in companies of different types (private companies on the one hand, and public and listed companies on the other) and size.
16.4 Empirical research should also seek to ascertain the extent to which bargaining over the form and content of directors' duties in fact takes place. A central contention of the economic theory of the corporation is that legal rules can be used to induce the parties to arrive at efficient allocations of resources through contractual arrangements. However, if, in practice, bargaining is seen as excessively costly or impractical, this potential role for the law may not be capable of being fulfilled. Whether this is the case is a question which cannot be answered a priori, but only through empirical investigation. Research here should focus on the forms which such bargaining can take; these include directors' service contracts, the contents of articles of association, shareholders' agreements and shareholders' resolutions.
16.5 In Part 3 it was also noted that that there is some empirical evidence from other jurisdictions (notably Canada) to suggest that if the standard of care for directors' duties of care and skill is raised, directors may be deterred from taking office and may also find it difficult to obtain the necessary liability insurance. We have also noted developments in Australia where the Government has issued for consultation draft legislation to introduce a statutory business judgment rule. Questions have also been raised concerning what the effect upon internal systems of communication, through which company boards ensure internal compliance with their general instructions, would be if the obligations upon directors were increased. These are also issues which can be addressed through empirical analysis. It will be necessary, in this respect, to find out more about the way directors perceive their current legal responsibilities under the duty of care, and how they would regard a possible restatement of the law. It would also be important to obtain evidence concerning the attitudes of commercial creditors, banks, the accounting profession and the insurance industry to these questions
16.6 It is hoped that empirical research will also throw light on the following specific issues:
(1) whether an authoritative statement of directors' duties would assist directors in practice;
(2) whether such a statement could most usefully be set out in legislation, or in some other form (such as an annexe to the articles of association);
(3) whether it would be helpful for such a statement to refer to release, ratification and approval, and to include reference to a business judgment rule;
(4) the usefulness to directors of non-statutory guidelines specifying what they should do in certain specific situations;
(5) the role of non-executive directors, and the extent to which they are independent of management;
(6) whether directors' service contracts which are "rolling contracts" are common;
(7) the length of directors' service contracts in private companies;
(8) how section 316(3) (concerning payments to directors for breach of contract) is interpreted and applied in practice;
(9) the behavioural effect of criminal penalties, and in particular whether they serve a useful purpose in backing up legal advice and making it more likely that rules will be obeyed, even if, in practice, there are no prosecutions;
(10) whether section 317 (concerning disclosure to the board of a contract in which the director has an interest) serves a useful purpose in a sole director company;
(11) whether further disclosure requirements are likely to produce benefits to shareholders;
(12) the costs of calling shareholder meetings; and
16.7 In order to examine these issues, a dual approach to the research will be undertaken. Firstly, information concerning corporate practices will be obtained through a questionnaire circulated to a representative sample of directors in companies of various types and sizes and in different geographical locations. Secondly, a number of face to face interviews will be conducted with directors, institutional shareholders, members of the accounting profession, lenders and lawyers. Together, these will provide a quantitative and qualitative basis for understanding the nature of current practices and possible effects of changes to the law.(13) the cost and practicability of shareholder-led litigation against directors.
Geographical considerations and acknowledgements
16.8 The survey will be addressed to directors in England, Wales, Scotland and Northern Ireland. The Law Commission, the Scottish Law Commission and the Law Reform Advisory Committee of Northern Ireland consider that the survey will make a valuable contribution to the project. We are very grateful to the Institute of Chartered Accountants in England and Wales, who are sponsoring the survey. We are also grateful to the Institute of Directors for the assistance they are giving in the formulation and distribution of the questionnaire.