A Trade Union Congress Perspective on the Company Law Review and Corporate Governance Reform since 1997
| Published date | 01 September 2003 |
| DOI | http://doi.org/10.1111/1467-8543.00285 |
| Date | 01 September 2003 |
A Trade Union Congress Perspective on
the Company Law Review and Corporate
Governance Reform since 1997
Janet Williamson
Abstract
This article examines the Company Law Review and other corporate gover-
nance reforms introduced by the Labour government since 1997. It argues that
an opportunity has been missed to implement fundamental change by giving
employees and other key stakeholders rights in companies equal to those of
shareholders. However, reforms that aim to make the existing system work
better by promoting responsible shareholder activity have been introduced, and
proposals to increase company disclosure on employee and other stakeholder
relationships are in the pipeline. The potential of the reforms to offer trade
unions new tools for promoting workers’ interests is examined.
1. Introduction
Trade unions have long regarded corporate governance as key to under-
standing power relationships in companies, and thus critical to the quality of
industrial relations in the private sector. Company law determines a central
issue: in whose interests must companies be run? The structures and roles of
the boardroom, reporting requirements and rules on appointing and incen-
tivising directors, are set out in a mixture of company law and corporate gov-
ernance codes. Thus, corporate governance and company law form a major
part of the context and culture of decision-making in companies, and have
a direct impact on the priorities of decision-makers. They are not areas that
trade unions can afford to ignore.
2. The case for change
Under the present UK system of corporate governance, the interests of share-
holders are paramount. The relationship between shareholders and directors
British Journal of Industrial Relations
41:3 September 2003 0007–1080 pp. 511–530
Janet Williamson is at the Trades Union Congress.
© Blackwell Publishing Ltd/London School of Economics 2003. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
is at the heart of the Companies Act, and ensuring that directors promote
shareholder interests rather than their own is a major theme of the Act.
Indeed, legally, a company is defined as its members — the shareholders.
(Since shareholders are elsewhere described as company owners, this raises
the interesting philosophical question of how shareholders can own them-
selves.) Apart from some discussion of the rights of creditors, the Compa-
nies Act has little to say about other company stakeholders. There is, of
course, section 309, which requires directors ‘to have regard...to the inter-
ests of the company’s employees in general, as well as the interests of its
members’. This does not, however, alter in legal terms the primacy of share-
holder interests, and arguably has had little or no impact on the behaviour
of company directors.
Some (see Plender 2003) argue that shareholder primacy gives British
capital an economic advantage by fostering flexibility and creative destruc-
tion, thereby enabling capital to move easily from old to new industries.
However, there is another side to this coin, which can be summed up by the
term ‘short-termism’. The TUC believes that the UK corporate governance
system encourages a short-termist, low-investment and low-productivity
approach to business (see paper by Gospel and Pendleton in this issue). The
emphasis on shareholder interests combines with a fear of hostile takeovers
and incentives for top executives to encourage directors to promote their
company’s share prices by paying higher dividends, rather than building up
organic growth through investment and innovation. This pressure has fuelled
high dividend payments,even where this is not justified by performance. Bank
of England research shows the share of profits allocated to dividends roughly
doubling in the 1980s, and continuing to rise during the 1990s, even during
the recession of the early 1990s, when profits were stagnant or falling (TUC
1999).
As most investment is financed from a company’s internal resources, high
and inflexible dividend payments reduce the resources available for invest-
ment, which, in contrast to dividends, has proved vulnerable to shocks and
recession. The priority placed upon dividend payments compared with invest-
ment is illustrated by pegging both at 100 in 1987 and comparing growth in
1997: dividend growth had outstripped investment growth by a ratio of nearly
3:1 (TUC 1999). As a result, Britain’s record on investment trails that of
our main competitors, with capital stock per hour worked 77 per cent higher
in France, 47 per cent higher in Germany and 46 per cent higher in the US
(O’Mahony and de Boer 2002). Research and development spending as a
percentage of GDP actually declined in the UK between 1981 and 1996,
widening the UK’s previous R&D deficit in comparison with our competi-
tors (HM Treasury 1998). Investment is recognized by the government as
being key to tackling the UK’s productivity gap with its main competitors,
and these low investment levels are reflected in the UK’s poor productivity
record. Output per hour worked is 29 per cent higher in France and the
USA than in the UK, and 27 per cent higher in Germany (HM Treasury
2002).
512 British Journal of Industrial Relations
© Blackwell Publishing Ltd/London School of Economics 2003.
To continue reading
Request your trial