Corporate Governance is about Best Practices

4159 words (17 pages) Essay in Free Law Essays

02/02/18 Free Law Essays Reference this

Disclaimer: This work has been submitted by a student. This is not an example of the work produced by our Law Essay Writing Service. You can view samples of our professional work here.

Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of LawTeacher.

Narrow sense: Corporate Governance is procedures and processes according to which an organisation is directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organisation – such as the board, managers, shareholders and other stakeholders – and lays down the rules and procedures for decision-making.


The Principles focus on governance problems that result from the separation of ownership and control. The goal of Corporate Governance is to establish structure and to determine the objective of the company, the means of monitoring performance and the means of attaining those objectives.

[p.1, what is good CG and what is HK doing]

OECD has proposed five Principles of Corporate Governance that are compatible with many different systems around the world.

The Rights of Shareholders and Key Ownership Functions

The Equitable Treatment of Shareholders

The Role of Stakeholders in Corporate Governance

Disclosure and Transparency

The Responsibilities of the Board

and indicate that the principle “are not intended to substitute for government, semi-government or private sector initiatives to develop more detailed “best practice” in corporate governance”, and suggests government to play their part by “establish[ing] the overall institutional and legal framework for corporate governance”.

[Preamble, OECD Principles of Corporate Governance 2004]

OECD indicate that the way corporate governance formulated to regulate different stakeholders “are subject, in part, to law and regulation and, in part, to voluntary adaptation and, most importantly, to market forces.

Therefore we can see that there are three parties that will be involved in the development and implementation of the corporate governance,

Law and regulation – Government’s legislative arm and court

Voluntary adaptation – Corporation

Market forces (most importantly) – other actors apart from the above, mainly refers to shareholders

This corporate governance framework typically comprises elements of legislation, regulation, self-regulatory arrangements, voluntary commitments and business practices that are the result of a country’s specific circumstances, history and tradition.

In this paper, we will discuss whether the legislative arm and court shall imposed the obligation to implement of corporate governance onto the corporate through statute or case law, under the purview of (i) Director’s Fiduciary Duty and (ii) Minority shareholder protection.

Question to be asked

How is the current statutory situation?

What is the limitation that will be brought to different stakeholder if the obligation is imposed under law?

Is there any other better alternative to remedy the problem?

Director’s fiduciary duty

In Hong Kong, the general duties of directors are mainly found in case law, leaving aside certain specific obligations imposed by the Companies Ordinance, and by the memorandum and articles of association of a company. In HK, to outline the general principles for a director in the performance of his functions and exercise of his powers, the Company Registry published a publication called “Non-statutory Guidelines on Directors’ Duties”.

Director’s duties can be classified into two broad categories: fiduciary duties, and duties of skill and care.

[p.1, Directors’ duties in Hong Kong: Codify or Not?]

Get help with your essay today, from our professional law essay writers!

Qualified writers in the subject of law are ready and waiting to help you with your studies.

Get help with your essay today

from our professional essay writers!

Visit to see how we can help you!

The fiduciary duties of directors, which are generally based on equitable principles, mainly include:

duty to act in good faith in the interests of the company,

duty to exercise powers for proper purpose,

duty to refrain from fettering his own discretion,

duty to avoid conflicts of duty and interest, and

duty not to compete with the company.

Fiduciary Duty





Paul Chow, Chief Executive of the Hong Kong Stock Exchange, recently wrote that rules imposed by regulators only go so far as to encourage compliance and added

[t]he final outcomes the investing public desires are that companies make decisions that are fair and add value for all shareholders – that is, the public is looking for honesty in business dealing. However, honesty is a matter of culture and morals: one cannot legislate for morals and therefore the regulator cannot mandate final outcomes. What the regulator can do instead is to insist that the outcomes – the business decisions – are arrived at after due process.’ (Chow, 2006, p. 3)

Judicial Intervention

High ethical standards are in the long term interests of the company as a means to make it credible and trustworthy, not only in day-to-day operations but also with respect to longer term commitments.

Judicial Intervention


An overall framework for ethical conduct goes beyond compliance with the law, which should always be a fundamental requirement.

Director’s Duty




Although case law sets out and elaborates on most of these significant principles, it tends to be complex and inaccessible. Codification can improve clarity and certainty for company management and members. [Non-statutory Guidelines on Directors’ Duties]

Voluntary corporate governance codes and standards that do not have the status of law or regulation. While such codes play an important role in improving corporate governance arrangements, they might leave shareholders and other stakeholders with uncertainty concerning their status and implementation. When codes and principles are used as a national standard or as an explicit substitute for legal or regulatory provisions, market credibility requires that their status in terms of coverage, implementation, compliance and sanctions is clearly specified.


As new experiences accrue and business circumstances change, the content and structure of this framework might need to be constantly adjusted. [OECD Principles of Corporate Governance]

Law cannot be easily designed in a way that makes them to implement and become enforceable in an efficient and even handed manner covering all parties.

Rebuttal: [Consultation by government and other regulatory authorities with corporations, their representative organisations and other stakeholders, is an effective way of doing this.

As the number of public companies, corporate events and the volume of disclosures increase, the resources of supervisory, regulatory and enforcement authorities may come under strain. Therefore, baseline principle/guideline can serve the purpose.

Possible factor. Overall implementation costs outweigh the benefits. Cost for effective enforcement, including the ability of authorities to deter dishonest behaviour and to impose effective sanctions for violations outweigh the benefit.

Judicial Intervention

If countries are to reap the full benefits of the global capital market, and if they are to attract long-term “patient” capital, corporate governance arrangements must be credible, well understood across borders and adhere to internationally accepted principles.

Judicial Intervention

May lead to over-regulation, which do not support the exercise of entrepreneurship and directors may limit the risks business exposed to avoid unnecessary liability. It will result in the destruction of shareholder and social values. Especial in R&D field.

Market can determine the deployment of resources most efficiently. Shareholder can easily sell off their shares in the market.

Rebuttal: Private co. minority shareholder does not have the advantage of freely share transfer

Fiduciary duties cannot be codified without being stated in detailed terms in which case there will be a loss of flexibility. If codification co-exists with common law and its development through judicial interpretation, this may lead to greater uncertainty and would not resolve the question of accessibility.

Other countries experience

Failure to follow corporate governance is not actionable

In 2006 the US court in the Disney Case while board of director should be encourage to adopt the best practice of corporate governance as they develop over time, “law does not – indeed the common law cannot – hold fiduciaries liable for a failure to comply with the aspirational ideals of best practice”

Get help with your essay today, from our professional law essay writers!

Qualified writers in the subject of law are ready and waiting to help you with your studies.

Get help with your essay today

from our professional essay writers!

Visit to see how we can help you!

In the case, the stockholders challenged the controversial hiring in 1995 and subsequent termination in 1995 of Michael Ovitz as president of Disney. They claimed that the members’ of Disney’s board did not properly evaluate Ovitz’s employment contract and the subsequent termination, which resulted in a severance package to Ovitz valued at approximately USD$140 million after only 14 month of employment.

The court note that, fiduciary duties, unlike best practice, do not change over time, and accordingly, the court applied the traditional protections afforded directors under the business judgment rule, which shields director from liability for decision made by them so long as they do not violate their fiduciary duty and are deemed to have acted in good faith. The court found that, although many aspects of the Disney directors’ conduct in connection with the decision to hire and terminate Mr. Ovitz did not comport with much of the currently prevailing wisdom on corporate governance practices, their conduct did not violate their fiduciary duties of loyalty. Indeed the court point out, in a case where the fiduciary duties is complied with respect to a action, but the outcome proved to be damaging to the corporation, “the redress…must come from the market, through the action of shareholders and the free flow of capital, and not from this court.”

[p.1 corporate governance alert]

Some common law jurisdictions such as the UK, Australia and Singapore have codified some of the fiduciary duties and the duties of care and skill in statute law.

In the UK, the CA 2006 introduces a statutory statement on directors’

duties which covers the following general duties:

(a) duty to act within powers;

(b) duty to promote the success of the company;

(c) duty to exercise independent judgment;

(d) duty to exercise reasonable care, skill and diligence;

(e) duty to avoid conflicts of interest;

(f) duty not to accept benefits from third parties; and

(g) duty to declare interest to proposed transaction or arrangement.

While the statutory duties replace the corresponding common law rules and equitable principles from which they derive, these duties are required to be interpreted in the same way as common law rules and equitable principles.

In other words, the courts should interpret and develop the general duties in a way that reflects the nature of the rules and principles they replace. This approach displays the UK Government’s intention to achieve both the precision of the statutory statement and the continued flexibility and development of the law. However, the effectiveness of this intention is subject to trial after the statutory statement has been implemented

[p.1, 2ndPCCOR_Chapter3_e.pdf]

Voluntary adaptation to tackle the director’s duty problem

Whereas rules within an organisation are another form of self-regulation (Ayres and Braithwaite, 1992, p. 19-20), unlike state laws or regulations, according to Giddens (1984) rules can be a form of routine and practice. Hence rules in an organisation are less rigid than state imposed obligations. Organisational formulated rules and codes tend to be more flexible, adaptive and responsive, but give rise to opportunistic behaviour by adopting selfserving interpretations.

[In Search of Good Governance for Asian Family Listed Companies: A Case Study on Hong Kong p.6]

Market forces (most importantly) – other actors apart from the above, mainly refers to shareholders

The market also compels regulatory functions via the ‘invisible hand’ of demand and supply. Markets aid parties to engage in voluntary exchanges. These exchanges are regulated by the price mechanism. An efficient market is said to exist when the price mechanism works. This is present when parties can enter freely into a transaction with adequate information so that the ‘real’ values of goods and services can be ascertained (Stiglitz, 2002). The advantage of markets is the self-regulating nature of voluntary exchanges and the price mechanism.

In addition, surveys conducted by McKinsey & Co. indicate that institutional investors are willing to pay an average premium of 20 percent for companies with good corporate governance (Coombes and Watson, 2000). These results indicate that the market values good governance and penalizes bad governance. This provides an incentive to companies to improve their governance practices. The rewards are improved market valuations and increased shareholder wealth. If they choose not to implement better corporate governance practices the market recognizes this and these companies trade at a discount recognizing their increased risk.

However, the shortcoming of this approach is that family-owned companies in HK with do not seem to be responding to market incentives to improve their governance practices. However market-based regulations assume that property rights are protected and information is widely available. In addition, market participants are assumed to be rational actors.

Market mechanisms assume that shareholders are willing and able to act. In a market like HK an overwhelming number of listed companies’ controlling shareholders are family members (see Table 1). Unless the minority shareholders are willing to pressure the controlling shareholder into action, this governance model is impotent. In HK many of the ‘elite’ business families enjoy near cult status. In addition, many investors are more concerned with short-term returns and target these high profile family businesses for their track record in generating high returns.

[In Search of Good Governance for Asian Family Listed Companies: A Case Study on Hong Kong p.6]

Partial Conclusion

Nonetheless state imposed regulation should be understood as a ‘fall-back’ to

be invoked when organisational rules fail. State regulations are not a substitute for

organisational rules (Farrar, 2001, p. 3-10)

Yet the underlying assumptions and arguments of each seem to be shaped by contextual considerations, which denote that there is no ‘one size fits all’ model.

Get help with your essay today, from our professional law essay writers!

Qualified writers in the subject of law are ready and waiting to help you with your studies.

Get help with your essay today

from our professional essay writers!

Visit to see how we can help you!

Mandatory explanation for any deviation from the corporate governance code recommendations.

Minority Shareholder Protection

In HK companies shareholders’ decisions are based on a majority vote. Following the spirit of Foss v Harbottle, the normal course of events is for internal company matters to be determined by majority vote; and (b) if a wrong is done to a company then only the company itself, and not individual members, may sue for redress.

The rationale for this rule is that it would serve no purpose to involve the courts in internal disputes in relation to irregularities when these can be ratified easily by the majority.

Minority shareholders are provided some protection under the HK Companies Ordinance (CO). These protections are discussed below.

Statutory Right to petition

Section 168A of CO provides in essence that a shareholder may petition to the court to examine his company affairs if the shareholder can prove that he has been subject to unfair prejudicial conduct, primarily from the larger shareholders. This section is supposed to give a single shareholder, however little shares he holds, a means to fight back against other shareholders. Yet the number of cases actually reaching the court is low. There are several reasons for this.

On the technical side, the term ‘unfair’ prejudicial’ is not defined in the CO. Courts have always been reluctant to do so in order to give the presiding judge maximum flexibility in deciding a case. In light of an ambiguous term, one becomes cautious in moving forward.

The second reason has to do with the very high legal fees in HK. There is still a split legal profession. A complicated case of this sort will almost always require legal representation. In addition, its technicality means the case will always commence in the Court of First Instance. This is the third highest court in HK, one of the three superior courts of record. The petitioner shareholder will therefore retain both a barrister and solicitor. Legal fees in HK are calculated according to time spent by the lawyers. Any amount in dispute is not a relevant factor.

Further, the fees remain the same regardless of the outcome of the case. This is because lawyers are not permitted to charge contingent fees.

Any damages awarded belong to the company, not to the individual shareholders who brought the claim. Thus other shareholders are able to free-ride on the benefit of the action.

Derivative action

Derivative action used to be called ‘fraud on the minority’ at common law. The idea is to give minority shareholders a means to pursue against delinquent officers if the company refuses to take action. In 2004 CO was amended to add a new statutory derivative action. Here shareholders can commence the action even if his company fails to comply with the law. Further, in contrast to the common law position (where an injunction is only available when damages would not be an adequate remedy), the remedy of damages is available in addition to or instead of an injunction.

Unfortunately, the total number of cases under both the common law and CO version has also been few. One reason is the cost issue just mentioned. Another reason is because the statutory derivative action is too new to see any significant results.

It can be seen that these mechanisms are not effective in reality due to practical and cultural reasons.

Current Situation

Court in HK seems to be more reluctant to allow shareholder actions than courts in Continental Europe. [p.407, Chapter 22 what is good CG and abt HK]. In Germany and Austria have frequently approved liability claims of minority shareholders against directors and in most case, the causes of action have been damage claims.

Minority Shareholder Protection





Abused by disgruntled shareholders

Does not give the court discretion to disallow any action in appropriate circumstances, as for example where there is a technical breach of duties by director but it would not be in the best interest of the company for an action to be brought. [409, what is good CG and abt HK]

Judicial Intervention

Specific board members may indeed be nominated or elected by certain shareholders (and sometimes contested by others)

In HK most listed company here are dominated by controlling shareholders. (Family-owned)

Judicial Intervention

In HK companies shareholders’ decisions are based on a majority vote. It is not for company law to superimpose sanction as to how they should use their capital in terms of voting power and the minority shareholder insofar the existing law is fair and reasonable.

[p.378 of what is good CG abt HK, paper]

Respondent in private co. can make an offer to buy out the petitioners as an alternative remedy. Respondent in a listed co. can exit from the market.

Rebuttal: Not in fair market price. Where there exists major corporate malpractice, a large number of shareholders will all seek to sell their shares. This results in significant loss of value through the decline of the price of the shares.

[p.411, what is good CG and what abt HK, paper]

Foreign experience

It is important to note that UK in 2006 attempts to modernize the law by introducing the principle of “enlightened shareholder value” under the director’s duty to promote the success of the company. The duty requires a director to act in the way which he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and, in doing so, having regard to a list of wider factors, such as the interests of employees, suppliers and customers and the impact of the company’s operation on the environment. The list is not exhaustive, but highlights areas of particular importance which reflect wider expectation of responsible business behaviour. The duty does not require a director to do more than good faith and reasonable care, skill and diligence.

It also noted that the UK approach on directors’ duty to promote the success of the company might cause some concerns among the business community

[p.3, 2ndPCCOR_Chapter3_e.pdf]

In Continental Europe, there is no identical concept based on “unfair prejudice”. A judge does not intervene in management decisions except in very extreme cases. Minority shareholder’ protection is done through various protective provisions on shareholders’ special financial rights. For example,

In Belgium the minority shareholders have a right to exercise a put option (i.e. an option to sell) at the charge of controlling shareholders, thereby realizing an exit;

In France, a claim for dissolution of the company is possible,

In Germany, Finland, Spain and Sweden minority shareholders are entitled to receive a minimum dividend (subject ot certain conditioner); thus, the controlling shareholders cannot starve out” the small owners.

Get help with your essay today, from our professional law essay writers!

Qualified writers in the subject of law are ready and waiting to help you with your studies.

Get help with your essay today

from our professional essay writers!

Visit to see how we can help you!

[p.412, what is good CG and what abt HK, paper]

Partial Conclusion

Minority Shareholder Protection is a residual result of the implementation of corporate governance and legislation.

Unlike fiduciary director’s duty, where court should not intervene and are not in the position to direct what director should or should not do, it is the very purpose of law should to protect the weaker party, and to compensate them if damage is received. The legislature may not be required to codify all the best practice, having said that, the court should take a more proactive role in protecting the rights of shareholder from invasion, especially those of minority. In respect the party autonomy, what can do is to lower the threshold to grant minority shareholder actionable ground, and provide them with an effective channel to bring action against directors or controlling shareholders for wrongdoing.

Final Conclusion

Corporate Governance that does not require the intervention of law, but can serve the purpose to promote the benefit of the company

Aligning key executive and board remuneration with the longer term interests of the company and its shareholders.


Purpose: The corporate governance framework should setup to ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.


In some countries there is also an additional body for audit purposes.

Ensuring the integrity of the essential reporting and monitoring systems will require the board to set and enforce clear lines of responsibility and accountability throughout the organisation. The board will also need to ensure that there is appropriate oversight by senior management. One way of doing this is through an internal audit system directly reporting to the board. In some jurisdictions it is considered good practice for the internal auditors to report to an independent audit committee of the board or an equivalent body which is also responsible for managing the relationship with the external auditor, thereby allowing a coordinated response by the board. It should also be regarded as good practice for this committee, or equivalent body, to review and report to the board the most critical accounting policies which are the basis for financial reports. However, the board should retain final responsibility for ensuring the integrity of the reporting systems. Some countries have provided for the chair of the board to report on the internal control process.

Companies are also well advised to set up internal programmes and procedures to promote compliance with applicable laws, regulations and standards, including statutes to criminalise bribery of foreign officials that are required to be enacted by the OECD Anti-bribery Convention and measures designed to control other forms of bribery and corruption. Moreover, compliance must also relate to other laws and regulations such as those covering securities, competition and work and safety conditions. Such compliance programmes will also underpin the company’s ethical code. To be effective, the incentive structure of the business needs to be aligned with its ethical and professional standards so that adherence to these values is rewarded and breaches of law are met with dissuasive consequences or penalties. Compliance programmes should also extend where possible to subsidiaries.

External corporate governance controls encompass the controls external stakeholders exercise over the organisation. Examples include:


debt covenants

demand for and assessment of performance information (especially financial statements)

government regulations

managerial labour market

media pressure


Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.

Related Services

View all

DMCA / Removal Request

If you are the original writer of this essay and no longer wish to have the essay published on the UK Essays website then please.

Current Offers