Tutorial 6 Company Law

UCL 3612 Tutorial Questions Topic 7 TRI 2210
Question 1
Why is corporate governance important? What role does the corporate governance play in cre
ating value for shareholders and how corporate governance serves or fails to serve the interest
s of the shareholders and other stakeholders in Malaysia.
Corporate governance important is because it is stated in The Preamble to the OECD Principl
es of Governance that ‘Good corporate governance should provide the proper incentives for t
he management and BOD to pursue the objectives that are in the interests of the company and
its shareholders and should execute the effective monitoring. When the effective corporate go
vernance system exists, it helps to provide a degree of confidence that is important for the pro
per function of a market economy towards the individual company and the economy as a who
le. In result of this, the capital cost is low and more firms are encouraged to use the resources
more efficiently, which makes the growth of the company in the market.’
The role that the corporate governance play in creating value for shareholders is stated under
the Malaysian Code on Corporate Governance. The Code itself has stated the company shoul
d be administrate by an effective BOD by leading and controlling of the whole company. Thi
s aligns with the general statement of the BOD’s role and function to manage the company. T
he role of a corporate governance can be seen in S. 131B of Part 2 of the Code. In the Part 2 o
f the Code, it sets out the following six specific responsibilities which are:
1. Reviewing and adopting a strategic plan for the company. (Strategy on the market)
2. Overseeing the conduct of the company’s business to evaluate whether the business is
being properly managed. (Effective management through evaluation)
3. Identifying the principal risks and ensuring the implementation of appropriate systems
to manage these risks. (Find out the risks and solve the risks)
4. Succession planning, including appointing, training, fixing the compensation of and w
here appropriate, replacing senior management. (New Gen. to succeed the position/Re
formation of the company)
5. Developing and implementing an investor relations programme or shareholder comm
unications policy for the company (Apply the rules & regulations for the investor to in
vest the company)
6. Reviewing the adequacy and integrity of the company’s internal control systems and
management information systems, including systems for compliance with applicable l
aws, regulations, rules, directives and guidelines. (Internal administration of the comp
any)
Corporate governance serves or fails to serve the interests of the shareholders and other stake
holders in Malaysia by shareholders maximisation profit theory and stakeholder theory.
In the shareholders maximisation profit theory, Contemporary commentary on corporate gove

rnance can, in general terms, be divided into two main camps, between those who consider
corporate governance as being about building effective mechanisms and measures to satis
fy either :
(1) the expectations of the variety of individuals, groups and entities (collectively ‘stakeh
olders’) that inevitably interact with the corporation; or
(2) the narrower expectations of shareholders (shareholder primacy).
In the case of Berle and Means, it states that ‘It is inconceivable, indeed it seems almost ess
ential if the corporate system is to survive, that the ‘control’ of the great corporations sh
ould develop into a purely neutral technocracy, balancing a variety of claims by various
groups in the community and assigning to each a portion of the income streams on the ba
sis of public policy rather than private cupidity.
In the stakeholder’s theory, it can seen in the words of Simon Deakins, that ‘what we are wit
nessing is a shift in the context of the shareholder value norm, so that it comes to represe
nt the idea that shareholder exercise their powers not as representatives of the market, b
ut as agents of society as a whole. The corporate governance of the future will be centrall
y concerned with how this idea is worked out in practice.’ In stakeholder theory, attentio
n is being given to stakeholders of the company, how the law influences corporations to
recognise and protect the interests of these stakeholders, and the relationship between th
e stakeholders and the underlying objective of companies of achieving and maintaining g
ood corporate governance.
Question 2
What was the importance of the Berle and Means thesis? Discuss
The importance of the Berle and Means thesis is to become the classic work on the separati
on of ownership and control. He observed that : (1) the shareholders in American compa
nies during this period were so numerous (dispersed) that no individual shareholder had
an interest in attempting to control management. (2) managers were not only unaccount
able to shareholders but exercised enormous economic power which had the potential to
harm society.
Due to the separation of ownership and control, principals (owners / shareholders) are n
ot able to run the company themselves and therefore have to rely on agents (managers / d
irectors) to do so for them.
This separation of ownership from control gives an added advantage to the agent over t
he principal, and this may raise a number of agency problems, such as :
• the agent not acting in the best interests of the principal,
• abuse of power, and
• lack of transparency (clearity) which could have an adverse effect on the shareholders.
‘Separation of ownership from control’ causing the corporation to have separation of ow

nership from control of the management.
Companies are mostly owned and controlled by a small number of major shareholders.
Concentrated ownership structure with limited disclosure.
Capita: family finances and banks for borrowings to raise funds.
Shareholders become more dispersed (and diffused) as owner/manager concentration sh

rinks. More widely dispersed shareholdings. No one shareholder or group of shareholde
rs who can exercise control over a company‟s directors effectively. If a shareholder is un
happy with the way the corporation is managed, he or she will usually sell their shares r
ather than trying to discipline the managers / directors.

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UCL 3612 Tutorial Questions Topic 7 TRI 2210

In the shareholders maximisation profit theory, Contemporary commentary on corporate gove

‘Separation of ownership from control’ causing the corporation to have separation of ow

Capita: family finances and banks for borrowings to raise funds.

Shareholders become more dispersed (and diffused) as owner/manager concentration sh

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