(d) "In a large listed company, there are no effective restrictions on the conduct of the directors compelling them to behave in the interests of shareholders or ‘stakeholders’."
As the number of shareholders increases within a company, it is almost impossible for all the shareholders to be involved in the management of the company’s affairs. Thus, the shareholders become increasingly distant from the daily affairs of the company which not only makes it difficult to control managerial excess, but it also makes difficult ensuring that directors act in the interests of shareholders.
Berle and Means identified that this gives management a greater level of freedom than they should have in theory to pursue objectives, which are inconsistent with the interests of shareholders interests. This notion has been a recent issue in the UK corporate governance cases and caused debate over whether there are any effective restrictions which compel directors to act in shareholders interests.
One argument that has emerged is expressed in Percival v Wright which argues that directors are fiduciaries who owe their duty to the company and not shareholder neither individually nor collectively. Therefore there are no effective restrictions to act in the interests of shareholders as they are not legally obliged to, an idea which is supported by statute.
Article 70 of table A explicitly states that subject to the Companies Act 1985 and any provisions in the company’s memorandum or articles of association the affairs of the company should be managed by the directors who may exercise all the powers of the company and shareholders have no power of ordinary resolution to give directions to the Board or overrule their decisions.
In theory, there are statutory powers conferred on shareholders through the means of the General Meeting. The most influential of these provisions is section 303 of the Companies Act, the provision for the removal of directors which states that directors can be removed by ordinary resolution. Therefore, directors would have to act in the interest of shareholders or risk being terminated from office.
However, in practice, exercising s.303 and other statutory provisions for the shareholders is more difficult to implement. In large listed companies which may have millions of shareholders, in practice, there is usually no overall voting majority, each shareholder usually only controlling only a tiny proportion of the overall vote. This being so, shareholders become ‘rationally apathetic’. For those who chose to vote, because they are distant from the daily running of the company, their vote is conducted on the advice of the directors. Thus, directors ultimately control the one organ, which holds the power to compel directors to act in shareholders interests.
Though statutory provisions can be seen as practically ineffective, there are other factors which can practically compel the behaviour of directors.
Shareholders interests are defined by Latham CJ in Mills v Mills as the enhancement of shareholder value or profit maximization. Therefore a decision or action which is contrary to this would be seen as contradictory to shareholders interest. As Goldenberg stated, the duty of directors is to maximise the company’s value on a sustainable basis which would refer to share price, and there are practically viable restrictions that directors have to adhere for there to be a sustainable growth of value of a company.
In the modern commercial market, many directors have a greater disposition to respond to shareholders interests as company policy affects them personally. For many directors they view the company’s reputation and more importantly there own as very valuable in themselves. In the modern economic market, share price is seen as a public indication on how well a company and its directors are maintaining its business interests. In addition to this, for many newly appointed directors, the share price of a company not only affect their bonuses and in some cases the annual salary of the company’s directors. Therefore it is important not only for the shareholders but also for these directors to continually adhere to shareholders interests and profit maximization.
Another restriction which compels director’s behaviour concerns the nature of takeover threats. If share prices seen as low for a considerable period of time, the company maybe subject to a takeover bid to with the directors may be terminated from office if the takeover bid is successful.
As previously mentioned the notion that management are insufficiently accountable to shareholders and that they are afforded too much freedom has been a recent issue in UK. So far, the measures taken to redress the balance have been limited. There have modest recommendations to shareholders in the form of the Cadbury and Greenbury Codes of Best Practice, which advise shareholders to actively become more involved in the affairs of the company and exercise their voting rights. There have been greater recommendations made in the newly drafted Higgs Codes of Best Practice, and while this serves to give shareholders greater control, the Cadbury and Greenbury Codes have not been seen as far reaching enough, while the Higgs Code is seen as too far reaching and will have to be toned down to successfully come into effect. The argument that there is commercial restrictions does hold to a certain extent, however, there is no requirement that the director have to follow these practices, it is at their own discretion. Thus the restrictions on directors are in place in theory, however, in practice, they are still not effective in compelling the behaviour of directors towards the interests of shareholders.
TABLE OF CASES
Bamford v Bamford  Ch 212
Mills v Mills (1938) 60 CLR 150
Percival v Wright  2 Ch 421
B Hannigan, (2003) ‘Company Law’, LexisNexis, London
  2 Ch 421