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"The directors are not servants to obey directions given by the shareholders as
individuals; they are not agents appointed by and bound to serve the shareholders as
their principals..." Gramophone and Typewriter Ltd v Stanley [1908] 2 KB 89 at 105
(Buckley LJ).

Critically discuss.
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 INTRODUCTION 

There are three principal/agent concerns that are addressed by fundamental business law. These

arise from the relationships between corporate controllers (supervisors or majority shareholders)

and stakeholders who aren't shareholders, as well as between majority shareholders and minority

shareholders. Three assertions are made in this work. Any of these issues with the agency may

first be addressed by the board's rules (composition, structure, duties, and powers). Second, if a

set of board rules tries to solve many agency problems at once, none of them will work very

well. Third, the modern movement of corporate governance has concentrated on attractive the

board's ability to deal with the first agency problem (leadership and stockholders as a lesson),

while leaving the second and third agency conflicts

1) Boards Relationships and Company Law

The first two categories of issues cannot coexist inside a business; the shareholder structure

determines which one is prioritised. Due to the nature of dispersed shareholdings, shareholders

and management face a principal/agent conflict. Concerns about collective action may make it

difficult for shareholders to exercise their statutory governance duties and monitor the

management of the firm. Management may put its own interests ahead of those of shareholders.

Thus, it is essential that company law mitigate the costs associated with principal/agent conflicts

arising from many owners.

However, policymakers may conclude that the second set of agency difficulties needs more

resources if significant corporate shareholdings are characterised by massive block-holders.

Regardless of where a legal system falls on the first two principal/agent issues, it must resolve

the third set. These arise because company insiders have vested interests in the company beyond
those of its shareholders. 5 Every body of legislation pertaining to corporations addresses the

creditor-debtor relationship. The relationship between businesses and their creditors varies

significantly depending on whether or not limited liability is the norm for shareholders.

The incentives for firm controllers to behave opportunistically are mitigated by restricted

liability, although this is constrained by business rules. 6 Interactions between creditors and

stakeholders are often the exclusive focus of corporate law systems. In more complex

organisations, the relationship between employer and employee is governed by company law.

The corporate laws of Germany and the Netherlands strongly support this approach, although

those of almost half the countries in the European Economic Area do not. The interests of

stockholders and employees are often overlooked in corporate law. The purpose of this research

is to ascertain how principal–agent interactions are governed under corporate law. Obviously,

such a large topic is beyond the scope of this particular research. The three principal/agent issues

are addressed, and nothing else, in this document. Company law solutions are to principal

problems that do not involve the board, such as a rule requiring businesses to distribute shares

pro rata to shareholders, will not be discussed here. The third through fifth sections analyse the

variety of board rule options available to policymakers in addressing the aforementioned

principal/agent problems; the sixth part covers recent policy developments; and the seventh

section provides a summary and conclusion.

CORPORATE GOVERNANCE PRINCIPLES AND THE CONNECTION BETWEEN

TOP EXECUTIVES AND THEIR SHAREHOLDERS

1) Duties of the board of directors of a company's shareholders

It might be argued that eliminating managers and replacing them with shareholders will

eliminate principal/agent conflicts between managers and shareholders (the shareholders). This

would quickly solve principal/agent conflicts, but it's too costly for huge corporations' investors.

To operate in this way would deprive stockholders of the benefits that come from concentrating

power in the hands of a small, committed management team. This 1st sort of principal issue

cannot be easily addressed if centralised management is required for large organisations to

function properly. When it comes to making decisions, all corporate laws are quite cautious

about requiring shareholder meetings. This is typically required by law only for three types of

corporate action: making changes to the constitution of company, making decisions that are

equally investment and management decisions (like merging with another company), and making

decision on subjects where directors have conflicts of interest.

The only way shareholders decide anything is if management suggests it. Consequently,

shareholders may vote against certain choices but have little power to actually make them. This

safeguards centralised leadership more effectively than needs for shareholder initiative.

Therefore, for reasonable practical reasons, boards of large corporations operate under a broad

mandate of powers under all systems: the shareholders' meeting and the board share

responsibilities, but the board preponderates. In some countries, like as Germany and the United

States, this result is mandated by company law, whereas in others, such as the United Kingdom,

shareholders may retain almost all decision-making authority for themselves even in large

corporations, despite opting for the reverse. One last time: the shareholder board's role in the

company. In the event of a hostile takeover offer, dissatisfied shareholders have an opportunity

to sell their shares and the board is held more responsible to the shareholders as a whole. It is
crucial that the hostile bidder may make an offer to target shareholders rather than target

management.

Boards of major firms lack clarity. In nineteenth-century works, the board is the shareholder

representative that ultimately makes managerial decisions. But if the board's duty to the

shareholders isn't acceptable, management will "capture" it and exploit it to shield themselves

from blame.1 However, legal approaches centre on the board and its members, either because the

board is seen as the company's senior management and so must be regulated as such or because

of a desire to re-establish the board to its nineteenth-century ideal. Business schools focus on

upper management, whereas law schools tend to focus on the board of directors and individual

directors.

2) Selection and dismissal of board members

The greatest way to ensure that the board remains accountable to shareholders as a whole is to

make it simpler for shareholders to remove directors who are unpopular. Accordingly, the board

must answer to shareholders who have the right to dismiss all or any of the directors at any time

and for any reason, provided that such a majority vote is supported by the shareholders. This

should be the case, at least, provided shareholders have the ability to call for meetings to discuss

the removal of directors and a reliable disclosure mechanism allows them to evaluate the board's

performance objectively. In contrast, provisions that limit shareholders' ability to remove the

board to specific events (such as the annual general meeting or the end of the board members'

terms in office) or that deny shareholders any removal rights at all are called "anti-removal

provisions" (as in the Dutch "structure" regime, where the board is an s) Shareholders may have

1
(Ni, X., 2020. Does stakeholder orientation matter for earnings management)
difficulty using their robust nomination or removal rights over the board in countries with

dispersed ownership arrangements owing to concerted action or other barriers.

These problems might arise from even a somewhat small share distribution. Institutional

shareholders in the UK have powerful removal rights, but it might be difficult for them to use

such rights due to competition among conflicts of interest and institutions between insurance

businesses and fund management and other sectors of financial conglomerates and. The "law on

the books" is the one thing, but its operation in practise may be quite different, and the impact of

business law must account for the incentive-structure that applies for those who are nominally

obligated to enforce its rights.2 Shareholders' ability to engage in concerted action might be

impeded if the law limits their ability to communicate with one another.

3) Reward systems for board members

The removal of rights is difficult, which is why countries like the United Kingdom desire to

change the board's composition and procedures. Assuming NEDs are submissive because of this

logic is risky since it suggests they are not actively advocating for shareholders. One may argue

that NEDs are incentivized to serve shareholders well since doing so would be beneficial to their

own professional standing. NEDs' ability to serve as effective corporate monitors is still up for

discussion. Without some level of shareholder accountability, independent directors (NEDs) may

not be able to overcome dominant CEOs' strong aversion to board oversight.

Non-executive directors (NEDs) may face the same conflicts of interest issues as the executive

board in certain situations. Alternately to requiring NEDs with alternative incentive structures on

2
(A., 2022. Do high-ability managers choose ESG projects that create shareholder value)
the board, the motivations of executive directors might be restructured. 16 Now, a substantial

portion of senior management's remuneration will be tied to shareholder-focused KPIs in an

effort to better align management's personal objectives with those of the company's investors.

This method turns management's objectives into a boon for stockholders, rather than thwarting

them as would be the case with shareholder or NED oversight. Share-option programmes or

other long-term incentive programmes may assist align executive and shareholder interests, but

there is no legal need for doing so. This is where the tax regulations that govern the profits made

from such schemes and the limitations that company law places on unusual share issues and

share repurchases become critical factors.

Risks associated with employing incentive systems to better align management and shareholder

interests are in the hands of executive directors. So, the incentive structures will mirror CEOs'

inherent conflicts of interest rather than eliminate them. Salary for executives is still a matter of

concern, however. Governments in market economies don't set minimum wages or cap salary

growth in the private sector. Executive pay seems to be a clear example of a market that has

failed. It would seem that neither monitoring by shareholders nor by non-executive directors has

been successful in correcting market imperfections. As a result, even in countries that have

significantly improved "corporate governance," the topic of CEO pay continues to spark debate.

4) Liability

While it may seem like the most apparent legal technique for resolving the principal/agent

dilemma between management and shareholders, delaying action until directors may be held

liable for incompetence or disloyal behaviour has kept this option off the table until now. Our

primary worry is that a court would use an overly broad threshold to retroactively examine
management's actions. A system's incompetent leadership may be held liable in any of them. The

business judgement rule, a subjective duty of care definition, and the requirement that directors

refrain from "gross" irresponsibility mean that in practise such regulations are rarely enforced in

exceptional cases.3

The requirements of basic loyalty and competence are intended to catch only the most severe

cases. The courts are more adept at identifying instances of self-dealing on the part of directors

than they are with identifying instances of other forms of disloyalty to shareholders. It is a

challenge for both civil law and common law to determine how far to apply the right to sue

directors for self-dealing.4 Directors, even those who didn't commit the claimed crime, may lack

the incentive to pursue legal action, and shareholders of large companies may face collective

action issues in regards to the lawsuit option, just as they may with any other decision. By

delegating the power to initiate litigation to lower levels of the shareholder body, such as even

individual shareholders or minority groups, the danger is increased that court case may be

initiated in the interests of these smaller groups rather than the shareholders as a whole. The UK

and Germany are debating whether or not to implement this law reform.

RULES FOR THE BOARD AND PRINCIPAL CONFLICTS B/W THE MAJORITY AND

MINORITY SHAREHOLDERS

Businesses and stock markets need to attract more outside capital, and minority shareholders

need to be protected legally in order to attract that capital. Such information is protected by

fundamental business law, but is it also protected by board rules? Although board rules are

utilised less often to address the majority/minority shareholder relationship, the answer is that

3
Nagati, H., 2021. The ESG–financial performance relationship
4
(D.H., 2019, Shareholder value (s).)
legal strategies stated above to handle the shareholders as a class connection may also be used to

tackle the problem. First, we'll examine the majority/minority legal approaches, and then we'll go

through our reasoning for rejecting them.

1) Functions of the Board

Having the board make decisions instead of the shareholders at a public meeting might shield

minority shareholders against abuse by the majority. The idea is that if the board isn't directly

responsible to the shareholders, they will be less likely to support policies that benefit the

majority at the expense of the minority. Thus, majority shareholders and minority owners may

both profit from centralised administration, but they may have conflicting goals when it comes to

the legal processes by which they might oust the board of directors (i.e. the majority).

Unresponsive boards may make neither decisions that benefit the minority nor the majority of

shareholders. The interests of minority may have to be put on the back burner across the board if

the majority is to be protected from the minority.

The board's influence (and maybe the interests of the minority shareholders) may be kept even if

decision-making has been delegated to the shareholders at general meeting by allowing

shareholders simply a veto power over the decision. Shareholders can't vote on a proposal until

the board supports it, and the company can't act without their approval. In a fully shareholder-

approved decision, shareholders both propose and vote on the final decision.

2) Having the ability to appoint and dismiss

As we have shown, the interests of minority shareholders are the only ones safeguarded by

centralised administration under a careless board. As a result, it is not guaranteed that the board

will protect the minority from management's or the majority's biased decisions. As an alternative
to legal action, minority participation on boards of directors is being considered. They'll know

how the board works and perhaps even be able to influence its decisions with this newfound

knowledge. Minority shareholders may seek representation on the board via litigation, although

they face minimal formal obligations. Cumulative voting is the most straightforward method to

boost minority representation on the board, but it is only legally enforced in a minority of U.S.

states.5

When there is little disagreement between the majority and the minority, cumulative voting may

not be necessary. However, when there is a significant dispute, it just transfers the problem to the

board and reduces the efficiency of centralised administration. Protecting minority shareholders

by limiting the voting power of big owners via voting limitations is ineffective. In this case, the

proposed resolutions to the two most prominent principal/agent conflicts run counter to one

another. Limiting the number of votes a single person may cast might protect incompetent or

corrupt leaders from being ousted by a tyrannical majority and provide voice to a disenfranchised

minority.6 Such a limitation may, for instance, make it more difficult for a successful acquisition

bidder to terminate management. This will reduce managerial responsiveness to shareholders as

a group and discourage takeovers by making management more resistant to hostile offers.

3) Liability

Judges may not be the best arbitrators of majority/minority disputes, just as they may not be the

best arbitrators of management/shareholder class issues. However, liability rules may serve to

safeguard minorities since laws establish minimum standards. The two primary methods are the

5
(D.H., 2019, Shareholder value (s).)

6
(A., 2022. Do high-ability managers choose ESG projects that create shareholder value)
following. To improve the quality and dedication of the board of directors is one. They might be

reworded to include not only "the company" (all shareholders), but also specific shareholders.

Non-board members may also fall under their purview. With this strategy, controlling

shareholders, rather than non-controlling ones, would be subject to such requirements, as

controllers may serve in dual capacities as shareholders and directors. This latter extension may

be used in business groups to make the parent company answerable to the outside shareholders

of a subsidiary company. There seem to be substantial arguments against directors' responsibility

to shareholders as a class in favour of individual shareholders even within single firms. The main

argument against it is that it goes against the cooperative nature of the business. The minority

shareholders might also be made to take legal responsibility. Similarly, the "controllers" of the

corporation should be made responsible for these duties so that the majority may exercise its

power via votes cast at board or shareholder meetings. The most difficult part of establishing

such requirements is establishing the norms of conduct for controllers. To have the courts assess

the relative benefits of controllers and non-controllers is not something that judges or

entrepreneurs would support. A court could only enforce the shareholders' informal agreement

under such a strategy.

4) Conclusion

Given the preceding, it seems that board rules may provide some relief from the

majority/minority shareholder principal/agent conundrum. For two reasons. To begin, this

obligation is more appropriately located in other parts of general commercial law. Protection for

minorities can come in the form of shareholder meeting voting rules (which will be discussed at

a later conference session) or the requirement, common in many nations, that dividends paid to

shareholders be distributed in proportion to each shareholder's ownership stake in the company.

Second, as we said, if the board rules are changed to settle the majority/minority argument, they

may be less effective in dealing with the primary agency problem. The two types of problems

may need different sets of rules, and legislators may have prioritised the first agency conflict.

Alternative solutions that make use of board rules to resolve the first agency conflict and other

provisions of company law to deal with minority/majority disputes may also be useful. Because

of its role as a go-between for shareholders and management, the board of directors is a natural

target for rules aimed at addressing the first agency conflict. Disagreement between a majority

and a minority may sometimes be resolved outside of formal board procedures.

AUTHORITY OF THE CONTROLLER AND STAKEHOLDERS, AND BOARD

REGULATIONS

It is possible for the board to enact rules designed to safeguard the interests of stakeholders who

are not shareholders. Only creditors and employees' interests are protected in this way. Although

creditor protection is fundamental to all company statutes, there is little precedent for the use of

board guidelines to protect creditors while a business is still active. Creditors' rights are

safeguarded by the board's duty to advance the "company's" (however that term is interpreted)

interests, at least up to the point of insolvency. However, specific commercial opportunism

directed against creditors may be forbidden by restrictions outside the purview of the board.

1) Having the ability to appoint and dismiss

Creditors have the option of negotiating board representation for themselves, although this is not

required by any applicable laws governing businesses. This will remain in effect until the firm

enters bankruptcy and new controllers are appointed by the creditors, a subset of the creditors, or
a court acting on their behalf. The speed with which the board should be reshuffled at the request

of the creditors' representatives is controversial. There is a correlation between nations' attitudes

about debt and their ability to keep the failing board in place for longer. A strategy of delaying

creditors' access to control may be implemented to "promote entrepreneurs".7 A "work out," for

instance, may be good for employees, clients, vendors, and upper management. It's unclear how

postponing creditor control of the company will affect negotiations. As was previously said,

governments that resort to company law to solve the corporation/employee agency problem

invariably resort to board rules. In most European countries, only around a third of the board

may be appointed by employees.

2) Encouragement

It seems that only the Dutch "structure" regime for domestic medium and large businesses

organises board member incentives to promote non-shareholder stakeholders' interests. In this

case, the board makes its own appointments, but shareholders and the works council have little

legal recourse against untrustworthy candidates. Management in this novel arrangement has

substantial autonomy from both shareholders and employees, but is restrained by weak

incentives to do so.

3) Regulations for Assuming Responsibility

The first step in safeguarding stakeholder interests is for countries without employee

representation on boards to reduce the legal obligation of directors to promote shareholder

interests as a class. When making decisions, especially in the face of a takeover attempt,

directors in the United States are able to take into account the needs of all interested parties

7
(Croci, E., 2018. The Board of Directors. In The Board of Directors )
because to "constituency" rules. These regulations may not safeguard shareholders' interests

unless they coincide with those of the current management. Both scenarios benefit from such

measures since they strengthen the authority structure at the top. Changing the responsibility

rules such that a single stakeholder group is added in place of shareholders may have an impact

on the extent to which the regulations are effective. As the company's demise approaches, the

remaining claims become creditors rather than investors. As the company's demise approaches,

the directors' culpability rules may shift to favour the interests of the creditors. Directors' ability

to act in the best interests of creditors prior to an official act of insolvency may be limited if

duties under insolvency legislation are retroactive to the time preceding bankruptcy.

INVESTMENT RETURNS AND THE AGENCY CONFLICT BETWEEN

MANAGEMENT AND SHAREHOLDERS.

The board regulations and legal frameworks of businesses are being altered by these

modifications. Recent "enterprise governance" advancements over the last decade are a prime

example of this.

In areas where management and shareholders may have a conflict of interest—such as audit,

remuneration, and board appointments—both books advocate for expanding the role of non-

executive directors (NEDs), particularly independent NEDs. Its purpose is to challenge the

authority of a head honcho CEO. Given that they interfere more with internal management than

law of company has traditionally permitted, it is scarcely surprise that these regulations aren't

legally mandatory. When independent NEDs adopt a board decision not to suit top management

for alleged misconduct, for instance, the law governing corporations provides an indirect but

important source of support for the codes. In the stock market, rules and regulations tie together
the codes that link investors and businesses. The UK Listing Rules, on the other hand, require

just that the company conform to the Combined Code or provide an explanation for why it does

not. If the board fails to meet these requirements, the stock exchange or listing authorities will

have no recourse against them. In conclusion, laws pertaining to corporate governance are

crucial, despite the fact that they are not often included in company law. Corporate governance

requirements, from a practical point of view, have increased the board rules that listed

corporations must observe. Corporate governance regulations have had a significant impact on

board rules in jurisdictions where company law has typically concentrated on the first agency

problem (managers and shareholders). How have they changed the dynamics between majority

and minority shareholders in countries (often in continental Europe) where this is a main issue

for agencies? Companies created in countries with such regulations may be affected when they

list on a foreign stock market subject to such regulations.8

For example, the NYSE mandates that all issuers have at least two independent directors and an

audit committee. Unlike a listing in the UK, a US listing requires foreign companies to follow

certain standards of corporate governance. Anglo-American codes may be adopted and adapted

by exchanges or other bodies representing major firms in continental European states. After the

Cadbury report, several countries on the European continent implemented very similar

initiatives. It's stunning to see this in black and white. A corporate governance legislation that is

fair for a country with a dominant first agency issue (management and shareholders) may be seen

as unreasonable for a country with a dominant second agency issue (majority/minority

shareholders). Historically, continental European corporate governance code initiatives have not

been as stringent as their Anglo-American counterparts, especially when it comes to

8
(A., 2022. Do high-ability managers choose ESG projects that create shareholder value)
enforcement. The widespread use of such codes, however, must point to actual or perceived

principal/agent problems on the European continent. Following examination, two components

emerge. To begin, certain answers to the first principal/agent problem may be applicable to the

second. In this way, independent directors may be the answer to both problems. Though the

meaning of "independence" would be subjective, "independent" directors might potentially

protect minority shareholders from controlling owners and shareholders in general from

management.

1) Value for investors and how majorities and minorities interact

Based on the discussion above, you may expect countries with large block shareholdings to take

steps to protect minority owners if capital markets become more involved in funding businesses.

Investors may be unable to purchase securities issued by companies with concentrated ownership

until these restrictions are lifted. Legislative developments could show this pattern. Block

holders will have one less obvious way to transfer power advantages to themselves if national

regulations adhere to EU Directive 89/592.9 Larger-scale, more far-reaching changes have been

made at the national level in terms of legislation. Italian "Draghi" legislation is a good example

of measures taken to protect the interests of minority shareholders. Although internal auditors are

seen as part of the board structure of big Italian firms, the aforementioned modifications go

beyond board rules. Draghi's alterations include factors not covered by board regulations, such as

those pertaining to shareholder meetings and bidding terms.

RESULTS AND DISCUSSIONS

9
Nagati, H., 2021. The ESG–financial performance relationship
The author proposes board regulations to address the three principal/agent conflicts found in

traditional business law. There are a variety of such relationships, including as those between

management and shareholders generally, between non-controlling and controlling shareholders,

and between the stakeholders and firm's controllers who aren't shareholders. The first

principal/agent conflict also motivated the most recent board rule revision. An increase in the

capital market's role in financing large firms is correlated with a rise in shareholder value. In fact,

more wealth for shareholders means safer holdings for all owners (after distribution of shares).

Generally speaking, company law has favoured both types of shareholder protection. Concerns

about agency representation on the part of stakeholders have not been taken into account in the

most recent iteration of board regulations. It would seem that protecting the interests of creditors

and employees, two stakeholder groups traditionally acknowledged by company legislation, are

no longer high priorities. The level of protection afforded secured creditors is contested by

certain countries. While employee representation on boards is widely practised in certain nations,

expansion efforts are uncommon in others.

Even if we limit our attention to board regulations, we cannot conclude that maximising

shareholder value is the primary policy goal. How can this overarching goal be squared with the

relatively little weight given to shareholder interest when setting board rules? The answer is that

shareholders' interests are best protected when the board is limited to promoting only those

interests, while non-shareholder interests are best protected by mechanisms that exist outside of

board rules and even company law. When the board's policies favour interests other than those of

the shareholders, concessions have to be made.

Those restrictions need to be considered in light of the many other areas of law that have

contributed to the predicament. It may be oversimplified to claim that board rules and company
law have no bearing on the business/stakeholder agency conundrum, even if the aforementioned

arguments are accepted. Stakeholder-directed legislation, especially stakeholder self-help laws,

may have some support under corporate law. The Company Law Review in the United Kingdom

advocates for stakeholder-focused policies by emphasising the importance of disclosure

requirements in company law. The UK's directors' duties are discussed at length in the Company

Law Review, which suggests a statutory framework. Concerns voiced in this research were taken

into account by the CLR when it proposed its formulation, which seems to place a premium on

the first agency issue in UK board regulations. Therefore, it is suggested that the usual

phraseology stating that directors owe their duties to "the company" be interpreted to include the

members (shareholders) as a whole.

This seems to be entirely beneficial to shareholders. When acting in the best interests of

shareholders, directors must take into account "the company's need to foster its business

relationships, including those with its employees, suppliers, and the customers for its products

and services; the impact of its operations on the communities affected, including the

environment; and the need to maintain a reputation for high standards of business conduct." The

use of legal mechanisms to enforce this "inclusive" obligation is not recommended. In actuality,

outside of rare circumstances, such conduct is very improbable. This is because the obligation to

promote shareholders' interests requires the director to use discretion "in the manner he believes

in good faith is best assessed in the circumstances." To adhere to the transparency concept, it is

necessary to take into account the views of all relevant parties whenever possible. The CLR that

a new section, "Operating and Financial Review," be added to the already extensive annual

records that publicly traded companies are required to disclose and make available because of the

critical information it contains for directors' inclusive mandate. The proposed changes to
corporate law do not go beyond existing information requirements. The power to legally or

otherwise apply pressure determines how shareholders, employees and their representatives,

customers, and suppliers use the information provided.

The purpose of corporate law is to facilitate self-help among a wider range of stakeholders via

the use of corporate transparency standards originally developed for shareholders and creditors.

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