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A radical programme for international company law reform

by Roger Warren Evans,  Barrister-at-law, West Wales Fabian Society 

1.  Corporate success   International business corporations have, in the past fifty years,  been the most dramatic global success.  Indeed, the progress of the corporate sector seems to have become endowed with an air of inevitability, as if determined by some form of organisational Darwinism.  Yet that success has been problematical.  Within the corporate sector, the abuse of power is rife, exploitation of man by man is common, and human rights are routinely abused. Governments seem flatfooted by comparison, lacking regulatory confidence, lacking innovative capacity and political initiative.  And the Left has so far failed to generate proposals to counter the evident abuses of power that regularly occur. There seem to be no checks and no balances, in the one-way onward march of the corporate sector.  

2.  Targeted campaign   Yet many of these wrongs can be countered, and if not all reversed.  I advocate a targeted reform campaign, designed to counter the abuse of power within the corporate sector.  It is the responsibility of the Left to mastermind that campaign, and to ensure that it is properly configured and targeted.  For the target is not globalisation as such, which promises great advantages for humankind,  the real prospects of greater freedom and higher standards of living. The target is not the trading community itself, all those men and women the world over actively engaged in the trading process, from sole trader to commodity trader, from small shopkeeper to Tesco, from peasant farmer to the wealthy farmers of East Anglia and the US Middle West.  The target is not the maldistribution of wealth: disparities of wealth between the super-rich and the indigent cause self-evident social and political problems, but they are not the focus here.  And the target is not the traditional Marxist-designated “big multinationals”, pillars of the capitalist system and scourge of the working-classes – indeed, the issue is not one specifically of Left-wing politics at all.  Although the reform will be led by the Left, it will attract support from a wide political spectrum.  

3.  Abuse of Company law loopholes    The target is simply defective company law.  That in turn means defective statute law, for all company law is statute law.  All the defects of every system of company law are to be found in a legislative statute of some date, in some country somewhere, however well tucked away.  I have identified five principal key defects to which I consider that priority should be accorded; others may well identify others.  It should be the aim of the Left to seek out and close the myriad legal loopholes, which are so widely exploited by manipulative corporate management.

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4.  Long international drive needed   Before specifying my five principal targets, let me explore the overall framework for the campaign, the process of political action.   

First: the campaign will have to be international. “Reform in one country” is not an option.  There are well over 200 countries or component federal states with parallel and sovereign systems for the creation of “companies” (or “corporations”, as the Americans call them).  All the leading jurisdictions will have to be brought into the ambit of reform, by a process of inter-governmental negotiation and compromise.    

Second: the campaign will be long.  At least ten years will be needed, to make any significant impact: it took the European Union twenty-five years simply to agree the format of a new “European Company”, and the Uruguay Round of trade negotiations, in the 1990s, took five years.  

5.  Understanding artificial personality   At the heart of all corporate power is the manipulation of artificial personality.  The essence of company law is that the business community is permitted by law to use “artificial persons”.  I have called them abdroids, from the sci-fi term android, adapted to abstractions. The rise of the abdroids has been particularly pronounced in the last fifty years, but the process was well under way by 1900.  And in order to understand the phenomenon, one must go back to the mid-19^th century, when the process actually started.   

6.  History  The UK was first into the company law field, as the leading country of the Industrial Revolution.  A first exploratory act was passed in 1845, but had many defects; the first effective Companies Act was passed in 1856.  This Act for the first time offered, to the business community, the easy option of “incorporation”, i.e. the right to use an “artificial person” as the owner of any planned business, thus limiting the personal liability of the entrepreneurs and shareholders themselves.  Use of abdroids grew very slowly, in the first 30/40 years: business convention favoured the retention of unlimited personal liability, and “companies” were regarded in the UK as a seedy, even dishonest, device.   

But by 1900, the use of abdroids was increasing more rapidly.  Japan’s first Companies Act, based on German models, was passed in 1900. In the period 1900/1930, abdroid growth mushroomed, within the business community.  The economic crises of the 1930s were in part a reflection of defects of company regulation.  Since then, every new country, every new legislature, has claimed, as part of the birthright of political independence, the right to define its own form of “abdroid”, for businesses registered within its territory.  And each state of the United States has its own company law: the best systems are in New York and California, but other state systems are far less satisfactory.   Yet all these systems spring from the same drive for legal privileges, started by the business community in the 1850s: the French Government also legislated to legitimise abdroids in 1856.  

8.  New Corporate Campaign   The  New Corporate Campaign will be fought on five fronts, each very contentious.   Bitter resistance should be anticipated from the business community.  For the power and influence of corporate management lies in the interstices of defective company law, defective  statutory regulation.   Reform would be technically straightforward, but the changes would radically change the face of the modern business corporation, and its relationship with societies in which it traded.   The New Corporate Campiagn would have to be fought on these five fronts –  

(1) Require proof of need

No substantive checks are currently made by Companies House before registering a new business abdroid. Certain misleading names are avoided, but there is no inquiry into what the abdroid is needed for, whether there is any indication of possible use for money-laundering, criminal or terrorist purposes;.  There is no investigation of the tax-status of the company promoters, or whether the abdroid was intended for tax-evasion or other fraudulent purpose.  In the UK, we have a system of “incorporation on demand”, within a few days of application: indeed, one can pay an acceleration fee of £100, and secure company registration within 24 hours, no questions asked.  New abdroids are being formed in the UK at the highest-ever rate in the country’s history: over 5,000 new abdroids are formed, in the UK alone, every week.  

(2) Introduce new checks and balances

The Victorians imagined a constitutional system for companies which would contain a range of checks and balances.  The shareholders would appoint, and keep a check on, the gentlemen Directors (later “the Board”).   The Directors would appoint, and keep a check on the working-men, the working management and other employees.  The Company Secretary would check on the company’s formal compliance with all the law’s technical requirements.  And an independent “Auditor” (a new role invented by the Victorians, which gave birth to all the accountancy professions) would prepare an independent report for the Shareholders every year, on what the Directors and their management had been doing with their money.  

That system has completely broken down.  The Management has taken control of the Board, and all major companies are led by powerful “Managing Directors” (a title unknown to the Victorians) or the “Chief Executive Officer” in America.  The Courts have cut the Shareholders out of day-to-day company management, ruling by 1900 that they could not intervene in company management, except by voting to sack the Directors.  The Management, having taken over the Board (so that outsiders are now even strangely called “non-executive Directors”, another term which would have meant nothing to the Victorians) have also taken over the control of the Auditors, even though they are formally still appointed by the Shareholders in general meeting.  The upshot is that there is, within the company structure, nobody to act as a check upon the Management.   And as the “star system” has come to dominate public life, both political and commercial, it is the “Chief Executives” who have succeeded to the most powerful positions of all, empowering and enriching themselves at will – the Murdochs, the Bransons, the Berlusconis, the Maxwells, and thousands of others. 

Different views abound, about how the company power structure is to be re-balanced.  Some would institutionalise new categories of “stakeholder”, including company employees.  My own preference would simply be to bring back the Shareholders, and to require prior shareholder approval for all key strategic company decisions, including the remuneration of all Directors and senior management.  

(4) Curtail property power  

Within Europe, and throughout the “expansion of Europe” by colonisation and imperialism, “property rights” were developed as the entitlement of “natural persons” long before artificial persons were invented, even imagined.  For the last two thousand years, perhaps longer, societies have had to develop concepts of “property” (both real and personal) for the good ordering of civic society.  And in the Anglo-Saxon tradition, those property rights have always been absolute in nature: the owner of an item of property has been accorded the right to treat that property as he wishes, without having to account to anyone for being “reasonable”.  Those powers have passed, by automatic legal reasoning, to abdroids, so that companies are permitted in law to behave unreasonably in relation to their property, merely because that freedom was traditionally accorded to natural persons.  That is wrong.  I believe that every abdroid should be under a duty to act reasonably in the exercise of any of its powers, and that the Courts should be entitled to review its actions accordingly.