Three conceptions of corporate governance as a regulatory tool

The regulatory regime for corporations covers a wide variety of regulatory systems. The degree to which the State plays a direct role and the degree to which other external parties and the corporation itself has regulatory responsibility for its own actions varies. In surveying the regulatory framework for corporations, it is useful to have as a reference, a regulatory structure of direct command and control regulation by the State. Nonetheless, regulatory functions are often performed by other entities, which include specific governmental agencies, self-regulating organisations, or the corporation itself. In the classic command and control regulation, the level of State involvement is high and most often the State is the only entity involved in implementing the regulatory regime. The State’s exercise of its regulatory functions can be delegated or directly exercised through an agency or delegated to a self-regulatory body. Even in situations where the State delegates its regulatory functions to a self-regulatory system, the system still operates under a shadow of possible State intervention. Also included in the regulatory framework is the voluntary system of regulation in which corporations either individually or through industry organisations impose rules on themselves. The imposition of self-regulation could be done for a variety of reasons ranging from the desire to improve consumer confidence to forestalling regulation by the State that is more restrictive.

Corporate governance – a broad view

The conception of corporate governance adopted by this paper encompasses both the internal governance mechanisms of the corporation and the broader public regulatory framework in which corporations operate. This conception of corporate governance is used despite the fact that some academics have tried to draw a principled distinction between substance and process in the regulatory framework for corporations. In this distinction, corporate governance regulates substance while other areas of the law regulate process. Corporate governance is thus used in a general descriptive manner to refer to all of the structural attributes and processes that determine the nature and relationships among, corporate constituents. In this conception, the scope of corporate governance incorporates how corporations are managed and controlled, by whom and to whom legal duties are owed, and against who related liabilities might be assessed. A non-exhaustive list of these corporate governance issues would include the rules governing the decision-making procedures of directors and officers of the corporation, the duties, and liabilities of the directors and corporate officers. Also included in the list of corporate governance issues are the rules on the preparation of reports, regulations, and liability for the preparation of accounts, voting rules for meetings of the corporations’ directors, rules against insider trading, restrictions on related third party transactions, disclosure requirements, and mandatory notification requirements.

Corporate governance – a public/private dichotomy

Another principled distinction that has been made concerning the scope of corporate governance has been to characterise corporate governance as private in nature, in contrast with other areas of the law such as public securities law, which are public. This distinction is not very useful for this paper largely because rather than providing a normative distinction, it is merely descriptive of the relation between US Federal and State law. In the US, the regulation of the internal affairs of the corporation and thus, corporate governance is in most part a function of State law. Under US conflict of laws principles, the corporation’s state of incorporation is the governing law for that corporation. Federal securities laws on the other hand govern the framework for the regulation of securities. The federal securities law through registration and financial disclosure requirements, and broad anti-fraud provisions regulate the conduct of corporations. In contrast, corporate governance in the UK is highly regulatory and thus inherently public in nature. The corporate code contains detailed mandatory rules on finance, formation, insider trading insolvent trading prohibitions and related party transactions. Violation by corporate managers of these mandatory rules may result in criminal prosecution and penalties.

An all encompassing view of corporate governance

One meaningful distinction running through the non-exhaustive list of corporate governance issues and the public/private nature of corporate regulation is the distinction between the issues restricted to the relationship between the shareholders and managers of the corporation, and those that expand corporate governance to include a wider range of persons and structural roles associated with the corporate enterprise. At a fundamental level, there is tension between two competing visions of the role of corporate governance whether corporate governance should be concerned primarily with ensuring managerial accountability or with enhancing corporate conduct. While distinctions can be drawn between substance and process, and public law and the private governance activities internal to the corporation, corporate governance is itself a function of both private decisions regarding optimal management of the corporation, as well as public law notions of director and officer responsibilities. The broader definition of corporate governance utilised in this study therefore incorporates all the areas of regulation that directly affect the relationship between the various constituents of the corporation. Encapsulated within this broader conception of corporate governance is the merger of the distinction between the public and private sphere for the regulation of the corporation. For instance, this broader characterisation of corporate governance would include the regulation of insider trading because it affects the relationship between the directors and officers of the corporation and the shareholders of the corporation.

My view on corporate governance encompasses the relationships and ensuing patterns of behaviour between different constituents of the corporation. Also, included in this view of corporate governance is the external set of rules that frame and shape the relationship among the various constituents of the corporation. Although, the discussion on external regulation is limited to securities regulation, this limitation is simply because the rules of securities regulation are more relevant to the regulation of transnational bribery than other rules such as the rules on environmental protection, competition, and bankruptcy.

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