In dealing with questions of corporate governance and corporate social responsibility (and, in particular, the stockholder v. stakeholder dispute), business ethics has long dealt in topics of direct relevance to company law. Up until fairly recently (the last ten years or so), neither UK company law nor the legal scholarship surrounding it seemed very much aware of these debates within business ethics. Now, it would seem, everything has changed. Discussions of corporate governance and, to a lesser degree, corporate social responsibility are now commonplace in at least the more theoretically inclined company law textbooks and there are even company law monographs devoted to these topics (see the 'guide to further reading' below for examples of both sorts of company law books). In this, company law scholarship is, for the most part simply reflecting changes, or at least moves towards change, in company law itself.

Insofar has it has been change as against the promise of change that has been the driving force, this has mostly occurred at the level of what can be called the 'quasi-legal' as against the fully legal. That is to say, at the level of bodies or set of rules which although they have no legal standing in terms of enforcement (they can be defied without breaking any law), nonetheless have an almost legal standing in that they are recognized by the law as part of an overall regulatory framework. What, in general, constitutes this recognition is the fact of being taken into consideration by either or both legislators in framing laws or by courts in enforcing laws. (The classic example of a set of rules with quasi-legal status is the Highway Code.) For company law at this quasi-legal level, the changes in question have been in self-regulation. The starting point was a series of business-sponsored reports on corporate governance. There was the Cadbury Report in 1992 (focusing on financial reporting), the Greenbury Report in 1995 (focusing on directors' remuneration), and the Hampel Report in 1998. The task of the Hampel committee was to consolidate the work of the other two reports by, in particular, drawing up a 'Combined Code' on corporate governance (published 1998) incorporating the recommendations of all three reports. This code was attached to the listing rules of the stock exchange with the requirement that in order to be listed companies must either declare their adherence to its provisions or explain any deviation from them: what is now called the 'comply or explain' approach.

These three reports were followed by others establishing a self-regulatory framework for what might be called ancillary aspects of corporate governance. Notable among them have been the Turnbull Report (1999) an internal controls, the Myners Report on institutional investment (2001), and the Smith Report (2003) on auditing committees. However, the most significant of these successor reports has undoubtedly been the Higgs Review (Jan 2003). It is significant for two reasons.

The first is that although, as its title heading says, concerned with 'the role and effectiveness of non-executive directors', it was also charged with reviewing the Combined Code and this it accomplished by something close to a wholesale revision of the code. The revision originally submitted in the review was much criticized in business circles as too restrictive and an amended revision (July 2003) produced under auspices of the Financial Reporting Council (FRC) removed some of its more controversial proposals (as well a providing very detailed guidance to its application by attaching schedules on directors' remuneration and non-executive directors' liabilities along with the Turnbull and Smith recommendations on internal controls and audit committees respectively). Under the heading '2003 FRC Code', this reviewised version replaced the 1998 Hampel code as an attachment to the Stock Exchange listing rules with effect from November 2003.

The second reason for the significance of the Higgs Review is that it is different from its predecessor reports in being government rather than business sponsored - in its case, by the Department of Trade and Industry (DTI). The significance of this lies in the fact that although still about self-regulation, it was linked with proposals for legislative change in the shape of the Company Law Review (CLR) conducted by the DTI. This process started in 1998 with the issuing of a consultative document by the DTI, was followed by a series of other documents culminating in a Final Report in 2001 and the White paper Modernising Company Law in 2002. (It is a further sign of growing government oversight of the self-regulatory side of corporate governance that following the de-mutualization of the stock exchange in 1999, control of the listing rules - and with them the 'comply or explain' enforcement of the Combined Code - was transferred in May 2000 from the stock exchange to the government appointed Financial Services Authority (FSA) by the Financial Services and Markets Act 2000.)

The interesting thing about the CLR from the point of view of business ethics is that those same issues of corporate governance and corporate social responsibility so long debated by business ethicists are very much at its heart (though how much change in either area will result from it is another matter). What, on the other hand, is less gratifying from the same point of view is how little informed by business ethics the CLR seemed to be. This was most strikingly evident in the almost 'homemade' way questions about the social function of companies were discussed, with what seemed to be the stockholder/shareholder value model talked of simply as the 'existing' system, what seemed to be a stakeholder approach spoken of as a 'pluralist' approach, and what looks to be a stakeholder approach pursued for the sake of stockholder ends (and the preferred option of the white paper) spoken of as 'enlightened sharehold value'. In short, the overall impression was of ideas being discussed as though they had little or no intellectual pedigree - and certainly not one that could be traced back to something called 'business ethics'.

With a few limited exceptions, much the same impression is gained from a perusal of company law books - even those specifically focusing on questions of corporate governance and corporate social responsibility. Judging by their citations, they too are not very much informed by business ethics as a subject.

That there is this lack of acknowledgement in both cases is to some extent the fault of business ethicists. Although centrally concerned with issues impacting upon company law they are neither much concerned with it as a subject nor much given to thinking about its possible reform. (The latter omission can perhaps be explained by the tendency within business ethics to focus on changing managerial practice rather than the way businesses are regulated.) The lesson, therefore, for business ethicists is that if they want to be more than just spectators of developments in company law they have to engage with it. This means not just knowing about those areas of company law relevant to them, but also establishing some sort of dialogue with legal scholars working in those areas.

2005 Update

The 2002 white paper was followed by the Company Law Reform white paper in March 2005 (with added draft clauses in July, September, and October of that year) and a Company Law Reform bill was introduced into the House of Lords on November 1st 2005. Though the wording was somewhat simplified, this again followed the 'enlightened shareholder value' approach of the 2002 draft bill.

More of a departure was Chancellor Gordon Brown's announcement in November 2005 of a decision to repeal provisions within regulations passed in March 2005 (amending the 1985 Companies Act) requiring quoted companies to present an annual Operating and Financial Review (OFR) reporting on, amongst other things, environmental impact, employee conditions, and engagement with social and community issues.

As originally set out as clauses in the 2002 draft bill, the requirement for an OFR applied to all 'major' public or private companies (though with much higher criteria for being 'major' in the case of the private) rather than just the quoted companies it ended up being required for. So the fact it is now to be replaced with what is presented as a less prescriptive 'Business Review' perhaps reflects government misgivings about its 'regulatory impact' that were present from its inception.

Contributed by John Kaler, Plymouth Business School

Guide to Further Reading

Company Law textbooks with a coverage of corporate governance and corporate social responsibility issues include B.R. Cheffins, Company Law: Theory, Structure and Operation (Oxford: OUP, 1997) and B. Pettet, Company Law (Harlow: Pearson Education, 2005 (2nd edn.)). Company Law monographs with a focus on these issues include G. Proctor and L. Miles, Corporate Governance (London: Cavendish, 2002), J. Dean, Directing Public Companies: Company Law and the Stakeholder Society (London: Cavendish, 2001) and, most notably, J.E. Parkinson, Corporate Power and Responsibility: Issues in the Theory of Company Law (Oxford: OUP, 1993). Articles on the Company Law Review are included in J. de Lacy (ed), The Reform of United Kingdom Company Law (London: Cavendish, 2002), with the relevant articles being those by Rickford, Birds, Riley, Muchlinski. (There are also useful appendices listing CLR publications, company law reform reports, and company law statutes in de Lacy.)

The various reports, reviews, and documents cited (along with many other relevant publications) are all available electronically. (The listing given here is taken from the Higgs final revision of the Combined Code issued in July 2003.)

The Higgs Combined Code revision (2003):http://www.fre.org.uk/about/combined.cfm

The Higgs Review (2003), together with full details of the research conducted for the Review and related information:
http://www.dti.gov.uk/cld/non_exec_review

The Cadbury Report (1992), Greenbury Report (1995) and Hampel Report (1998): http://www.ecgi.org/codes/country_pages/codes_uk.htm

The Smith Report (2003): http://www.frc.org.uk/publications/content/ACReport.pdf

The Financial Services Authority's Listing Rules (2002) (see in particular paragraph 12.43A): http://www.fsa.gov.uk/pubs/ukla/

Corporate governance codes in other countries: http://www.ecgi.org/codes/all_codes.htm

Information on the Company Law Review (2001) and the Company Law White Paper (2002): http://www.dti.gov.uk/cld/

Copies of guidance produced by the Institute of Chartered Secretaries and Administrators: http://www.icsa.org.uk

The Institutional Shareholders' Committee's document 'The Responsibilities of Institutional Shareholders and Agents - Statement of Principles' (2002): http://www.investmentuk.org/press/2002/20021021-01.pdf

The Tyson report on the Recruitment and Development of Non-Executive Directors (2003)
http://www.london.edu/tysonreport/Tyson_Report_June_2003.pdf

The Myners Report on Institutional Investment in the UK (2001): http://www.hm-treasury.gov.uk/media//843FO/31.pdf

The Directors' Remuneration Report Regulations 2002: http://www.hmso.gov.uk/si/si2002/20021986.htm

The DTI Consultation document "Rewards for Failure": Directors' Remuneration - Contracts, Performance and Severance', (2003) http://www.dti.gov.uk/cld/4864rewards.pdf

The report of the EU High Level Group of Company Law Experts (the "Winter group") (2002):
http://europa.eu.int/comm/internal_market/en/company/company/modern/index.htm

The European Commission's Action Plan for Company Law and Corporate Governance (2003):
http://europa.eu.int/eur-lex/en/com/cnc/2003/com2003_0284en01.pdf

Company Law Reform white paper (2005): http://www.dti.gov.uk/cld/WhitePaper.htm

Draft Clause and Explanatory Material (2005): http://www.dti.gov.uk/cld/clauses.htm

Operating and Financial Review (2005): http://www.dti.gov.uk/cld/financialreview.htm