UK Company Law Research Articles

Earnings Management in the UK: The Nonlinear Relationship Between Managerial Share Ownership and Discretionary Accruals

The paper examines the relationship between share ownership by boards of British stock exchange listed companies and accrual based earnings management. It provides the first empirical evidence that the relationship is impacted by UK Company Law and the institutional governance framework.We specifically model nonlinear relationships between the equity stakes owned by executive directors and discretionary accruals to account for managerial alignment-incentive and entrenchment at different levels of share ownership. To explain the nonlinear relationship, we discuss the UK institutional governance framework and highlight key regulatory thresholds. Piecewise linear regressions test the impact of these key regulatory thresholds on the earnings management-ownership relationship. We find that share ownership by executive directors has a significant impact on the level of discretionary accruals. The relationship is negative when the equity stakes of executive directors are below the 5% threshold of the ABI dilution limit and sections 376-378 of Companies Act 1985. Earnings management increases above 5% and below 10% of share ownership by executives. Once the 10% equity threshold of section 209 of Companies Act 1948 is reached, executive share ownership effectively mitigates accrual based earnings management. We find no evidence that equity ownership by non-executive directors mitigates earnings management practice of British companies.

The Not-So-Dynamic Quality of Corporate Law: A UK Perspective on Hansmann's ‘Corporation and Contract’

In long-term contractual relationships, such as those between a company’s shareholders, adjustments to the terms of the relationship are likely to be necessary over time. In a stimulating article, Professor Hansmann has argued that this necessity entails an advantage of the law’s ‘default rules’, compared to the parties’ own express terms. The state is likely to update its default rules over time and, as it does so, the terms of the parties’ contracts that incorporate such defaults are likewise updated automatically. Updating the parties’ express terms, by contrast, may require the unanimous agreement of all contracting parties, or at least a special majority, opening up the likelihood of minority vetoes and opportunism. This ‘dynamic’ advantage of legal defaults best explains, Hansmann argues, the paucity of express contracting amongst shareholders. In the UK, however, the main body of company law’s default rules are found in the model articles of association. Yet those who accept these rules are not bound by subsequent amendments to them. This article seeks to explain, and to justify, this feature of UK company law. In so doing, it casts doubt on the preference of shareholders to allow a third party – even one as trusted as the state – to update automatically the terms of their relationship.

The abandoned mandatory OFR: a lost opportunity for SER?

PurposeAn important outcome of the UK Company Law Review (CLR) involved draft regulations for a mandatory operating and financial review (OFR). The unprecedented abandonment of this mandatory OFR in November 2005 threw debate about the genuine motivations underlying the CLR into disarray. This paper seeks to reinterpret the abandonment of a mandatory OFR using interview research.Design/methodology/approachThe authors conducted a series of 24 interviews with companies from the FTSE100 between May and August 2004, prior to the abandonment.FindingsThe interviews showed that the OFR was perceived as an appropriate vehicle for social and environmental reporting (SER). The interviewees considered that a mandatory OFR would provide a means of forcing SER into the mainstream and making it mandatory at a basic level. The interviews revealed that processes for the identification of material SER differ widely between organisations, ranging from embryonic to highly structured. Further, interviewees believed that directors had the final veto on inclusion of information. Despite directors' inclination to hide behind materiality as a means of avoiding SER, interviewees did not view the proposed mandatory OFR as “greenwash” but as a vehicle that would increase stakeholder confidence, as processes underlying the proposed OFR would be audited.Practical implicationsThe research implies that abandoning the mandatory OFR represented a lost opportunity for SER.Originality/valueThe paper provides new evidence on the processes of materiality decision making in the SER area as well as strong endorsement of the mandatory OFR, contrary to the government turn‐around.

Social and environmental reporting in UK company law and the issue of legitimacy

PurposeThis paper seeks to examine the introduction, in the UK, of reporting on social and environmental matters in the Companies Act 1985 (Operating and Financial Review and Directors' Report etc.) Regulations 2005 and the subsequent changes embodied in the Companies Act 2006. It aims to explore the potential impact of these reporting requirements on corporate legitimacy. Legitimacy is important because it reflects, and arises out of, society's support for the activities of the company.Design/methodology/approachThe paper compares the Companies Act 1985 (Operating and Financial Review and Directors' Report etc.) Regulations 2005 with the Companies Act 2006. A postal survey was used to collect data from 79 companies that were affected by the operating and financial review. The reactions of different stakeholder groups to the changes in the law are assessed using secondary data sources, and issues surrounding legitimacy are analyzed using appropriate literature.FindingsCompanies that had to comply with the requirements of the operating and financial review were sufficiently prepared for its implementation and, given the choice, preferred the operating and financial review to be statutory. The authors therefore argue that the reasons for repealing the operating and financial review were overstated. Also, legitimacy theory indicates that the new reporting requirements are unlikely to meet the information needs of all stakeholders.Originality/valueThe paper provides a valuable analysis of how corporate social responsibility, which is deemed to be important for sustainable development, has been incorporated in law. It also provides a valuable analysis of how the law will affect corporate legitimacy.

Corporate Social Responsibility (CSR), Company Law and Employees Interest: The Case of Irish Company Law: A Note

This note examines the emerging trend in company law to accommodate employees’ interests as stakeholders in the company. The note examines this trend in the context of Irish company law with reference also to UK company law. The note posits that the present state of the law is merely symbolic as the duty introduced to safeguard employees’ interests is practically unenforceable. The note suggests how this asymmetry can be overcome in Ireland’s context.

The Illusion of Importance: Reconsidering the UK'S Takeover Defence Prohibition

AbstractThis article considers the significance of the UK Takeover Code's non-frustration prohibition. It asks to what extent the prohibition actually prevents post-bid, director-controlled defences that would not have been, in any event, either formally prohibited by UK company law without share-holder approval or practically ineffective as a result of the basic UK company law rule set. It finds that there would be minimal scope for director-deployed defences in the absence of the non-frustration prohibition, and that, in the context of UK company law, such defences have limited scope to be deployed for entrenchment purposes. Furthermore, this minimal scope for board defensive action would, in order to be compliant with a director's duties, require a pre-bid, shareholder-approved alteration to the UK's default constitutional balance of power between the board and the shareholder body to allow corporate powers to be used for defensive effect. In light of this conclusion the article looks for a rationale to justify denying shareholders the right to make this limited and potentially beneficial defensive election. It concludes that no persuasive rationale is available and that the prohibition is unnecessary and without justification.

Report on the CECL Conference on European Company Law in Accelerated Progress

On 23 September 2005 a conference was held in Leiden, the Netherlands, about recent developments of European company law, inspired by the adoption of the Commission?s Action Plan in 2003.Many topics were covered, inter alia the EC harmonization ability as such, the Takeover Directive, the SE and the pending reform of UK company law. During the conference, discussions were initiated by Professor Jaap Winter.

Transparency and the disclosure of risk information in the banking sector

The essence of any bank is that it is a risktaking enterprise and therefore, as a part of good corporate governance, it is expected that relevant risk-related information will be released to the marketplace. Currently, however, it is suggested that there is insufficient disclosure of risk information by banks and as a consequence Pillar 3 of Basel II lays out a comprehensive framework for risk disclosures with the intention that this will enable stakeholders to assess the risk pro.le of a bank. In addition, one outcome of the UK company law review is that there will be a requirement for all quoted companies to discuss risks and uncertainties within the annual report. This paper analyses these risk disclosure requirements while also reviewing current bank disclosure practices within the context of this risk disclosure debate. The important issues of disclosure of forward-looking risk information, location of disclosure and proprietary risk information are also discussed together with their implications for the proposed disclosure requirements.

“One Size Fits All”—Small Business and Competitive Legal Forms

This article examines the proposals of the Company Law Review Steering Group (CLRSG) and the subsequent Government White Paper in relation to small, closely-held businesses and evaluates them in the light of the nature and needs of this heterogeneous sector. It suggests that some types of deregulation attempting to cater for particular types of firm can actually introduce complexity (‘complex deregulation’). The article argues that, given the variety of businesses in this sector, and the dynamic nature of small businesses, a ‘one size fits all’ approach which starts small but can be adapted as a business grows (and also if it shrinks) is preferable to an attempt at precise tailoring of legal forms for different types of small business. In conclusion, it is maintained that the proposed reforms for small businesses are helpful and the fact that they are not radical is not necessarily a serious defect. The main criticism levelled at the Company Law Review (CLR) exercise is that the opportunity was not taken to examine thoroughly the role of limited liability for small firms and to consider the entire range of legal forms available to the small business and the relationship of these forms to each other. If we confine the examination to UK company law, however, we see that it is already flexible and sets up few barriers to entry for small firms operating in the UK. The proposals made by the CLR, as adapted by the White Paper, will maintain the attractiveness of the UK as a base for small businesses without, for the most part, removing creditor and minority protection as more radical changes might do.

UK corporate reputation management: The role of public relations planning, research and evaluation in a new framework of company reporting

The permeation of the corporate social responsibility imperative and the proliferation of the Internet across the globe have begun to redistribute social influence. A wider spectrum of competing stakeholders now exists and as a result corporate strategies and governance structures are subject to greater demands for transparency and accountability. In this context, reputation, of which the public relations practitioner is custodian, is now a company’s most valuable and fragile asset. To help rationalise the accountability dynamic, proposed changes to UK company law could enable a more inclusive approach to corporate reputation management through a change in definition of directors’ duties and the introduction of a non‐mandatory operating and financial review (OFR) to include intangible assets within a company’s reporting framework. The proposals are likely to be the subject of a white paper and legislation in the this session of parliament. This paper argues that by demonstrating greater emphasis on planning, research and evaluation the public relations practitioner can more effectively inform the company reporting framework and exceed the demands of accountability necessary for successful strategic corporate reputation management.

Company Law Reform in the UK

The UK has embarked on a fundamental review of company law. The first stage of the process was completed in July 2001 and reform proposals are now being considered by the government. Modernisation of company law is part of a drive to facilitate enterprise and enhance the attractiveness of the UK as a location in which to do business. This paper, which was first prepared for the 9th Singapore Conference on International Business Law, considers how well the proposed new legal framework measures up as a regulatory product that will be attractive to business and foster business competitiveness. Proposals in three areas are examined closely: simplification so as to promote business creation and growth; corporate governance and directors' duties; and the institutional framework of regulation. I suggest that if the simplification proposals are implemented in their current form UK company law will become much clearer and more comprehensible. Greater clarity should ensure some competitive advantages. In the area of corporate governance and directors' duties, the strong, continuing preference for detailed legal rules suggests that policymakers are sceptical about the ability of the market to put in place effective corporate governance controls without significant state intervention. Whether the preference for detailed rues supported by tough (often criminal) sanctions strikes the right balance between managerial freedom and investor protection is open to question. With regard to the institutional framework of regulation, my assessment of the proposals to expand the regulatory responsibilities of accounting bodies so as also to cover general company law is that these seem likely to promote a shift away from self-regulation towards greater public institutionalisation of corporate regulation, a result that sits uneasily with the presumption against state intervention which was adopted as a guiding principle at the outset of the reform initiative.

UK Company Law Reform

UK Company Law Reform

Current Comment – EU Briefings, Competitions and Mergers, UK Competition Law,Education, Employment Law, Financial Services and Company Law, Insurance Law, Intellectual Property/IT Law, Pharm

Current Comment – EU Briefings, Competitions and Mergers, UK Competition Law,Education, Employment Law, Financial Services and Company Law, Insurance Law, Intellectual Property/IT Law, Pharm

Reforming Directors’ Duties

Introduction: Taken together, the English and Scottish Law Commissions, the DTI and the Company Law Review Steering Group (‘CLRSG’) have produced hundreds of pages on the subject of directors’ duties during the last three years. All of this work is just a small part of the DTI’s current review of the whole system of core company law, a review billed as the most comprehensive ever undertaken in the UK. This note cannot do justice to the detailed work of all these bodies, but aims simply to summarise the principal directions of the work so far produced – and only so far as it relates to directors’ duties – and to highlight some aspects which give cause for concern. In doing that, it is consciously biased towards consideration of the perceived problems, rather than praise for noteworthy advances. The reason is simple. This mammoth review process is not yet completed. The CLRSG is due to produce its final report in Spring 2001. Before that date, it seems important to cast a critical eye over the work completed so far. That said, it would be surprising if the CLRSG did not already intend to address some of the issues raised here. Its work to date has always been presented as part of a consultation process aimed at discovering the optimum solution. The need for a comprehensive reform of UK company law is not doubted. The UK rules have long ceased to provide an enviable model for other countries to adopt. The current companies legislation is widely regarded as being too complex and detailed, and as containing rules which are now either obsolete or unwarranted. The DTI’s stated aim is to produce a simple, rational framework which is modern and competitive, and which facilitates enterprise and promotes transparency and fair dealing. It is against this that its efforts need to be judged.

Accountability vs privacy, 1844–1907: the coming of the private company

Recent periods have seen demands for increased corporate disclosures and new technologies by which those disclosures may be widely disseminated. These trends have coincided with a period of intense competition. Embarking on a major review of UK company law, the Department of Trade and Industry seeks to balance transparency with commercial freedom. This paper considers the causes of secrecy, and the circumstances in which it came into conflict with accountability in registered companies in the UK during the second half of the nineteenth century. It examines the approaches adopted in attempts to resolve that conflict, leading to a distinction between companies inviting public subscription, in which a substantial measure of accountability was expected, and private companies, in which proprietors were permitted a large measure of privacy. Although the creation of the private company at first appeared to provide a satisfactory solution to the problem, new difficulties soon emerged in attempting to restrict the privileges attaching to it to those situations for which it had been intended.

Limited Liability: Large Company Theory and Small Firms

Current enthusiasm for the ‘enterprise culture’ results in strong support for easy access to limited liability forms of business organisation. This has manifested itself in the creation of new limited liability vehicles such as the LLC and the LLP. The UK Company Law Review is examining ways of enhancing the attractiveness of the limited liability company to small business owners. This article examines the claims made for the ‘efficiency’ of limited liability and the applicability of these claims to small firms. It raises the importance of taking into account public policy issues beyond economic efficiency when considering the degree of risk taking and shifting to be encouraged. The article concludes that, although it is difficult to find rational methods of restricting access to limited liability, it does not follow that limited liability should be positively encouraged for all small firms. It is important to signal the limitations of limited liability.

'Developing Directors' Duties': The Legal and Theoretical Context

The Law Commission of England and Wales and the Scottish Law Commission published in 1998 a consultation paper dealing with duties which directors owe to their companies (the report is available at http://www.open.gov.uk/lawcomm/library/lib-comp.htm#libcp153). In this document, the Law Commissions assessed whether basic duties found in case law should be put into statutory form and reviewed existing legislative provisions to determine whether they could be simplified and modernised. The publication of the consultation paper acted as the triggering event for the organising of a conference on directors' duties in Cambridge in December 1998 and one of the primary purposes of the event was to debate issues arising from this document. This article places the proceedings of the Cambridge directors' duties conference in context. It does so by describing various trends which are currently helping to make UK company law an intellectually stimulating subject and by explaining how these are relevant to the work done by the Law Commissions and to the various published contributions made by conference participants.

Accounting does not "evolve": a reply to Jones

Jones (1999) attempts to explain the course of UK company law in the Victorian era by referring to Dicey's schema, according to which a period of laissez-faire legislation was succeeded in the 1870s by an era of collectivism. Jones asserts that the removal of an accounting disclosure requirement reflected laissez-faire principles, which he takes to mean a Victorian belief that business should be free of all regulation. I question this approach. The Victorians invoked laissez-faire, but their interpretation of its policy implications varied widely. There was no consensus as to whether limited liability companies created a free market or distorted one by removing the natural sanction of business failure. Similarly, some commentators stressed that accounting publicity helped to protect small investors, others that it was an intrusion into the private affairs of large investors. Non-disclosure was not, as Jones asserts, a concomitant of laissez-faire; it was a policy choice that promoted the interests of large “insider” investors and disadvantaged outsiders.

The market reaction to auditor resignations

Under UK company law, external auditors who resign must warn shareholders and creditors of any matter that ought to be brought to their attention. Auditor resignations and the subsequent change in auditor are informative corporate events. Resignation from office is likely to be a costly signal for the audit firm, particularly when the client is a quoted company. Our analysis of daily data suggests that there is a negative reaction to the auditor resignation on the date of the resignation letter, even though very few auditors indicate there were problems of which the shareholders and creditors should be made aware. This provides backing for the statutory rules on disclosure of the auditor resignation. We also find that the extent of the market reaction on the day of the resignation is related to the size of the resigning audit firm.

Corporate Governance Report: Modern Company Law – for a competitive economy [Proposals for a fundamental review of UK company law] Department of Trade and Industry, London, March 1998

Corporate Governance: An International ReviewVolume 6, Issue 4 p. 278-283 Corporate Governance Report: Modern Company Law – for a competitive economy [Proposals for a fundamental review of UK company law] Department of Trade and Industry, London, March 1998 First published: 09 October 2008 https://doi.org/10.1111/1467-8683.00116Citations: 3AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Citing Literature Volume6, Issue4October 1998Pages 278-283 RelatedInformation