1 There is a parochial aspect to this analysis, insofar as other countries have developed rather different patterns of ownership and correspondingly different, and often reduced, versions of the control problem. See, for example, Gilson and Roe, ‘Understanding the Japanese Keiretsu: Overlaps Between Corporate Governance and Industrial Organisation’ (1993) 102 Yale Law Journal 871; Roe ‘Political Elements Behind Insurance Companies as Passive Investors’ Working Paper 87, The Center for Law & Economic Studies, Columbia University School of Law; Roe ‘Some Differences in Corporate Structure in Germany, Japan, and the United States’ (1993) 102 Yale Law Journal 1803; Baums ‘Corporate Governance in Germany: The Role of the Banks’ (1992) 40 Am J of Comp Law 503.

2 Main and Johnston The Remuneration Committee As An Instrument Of Corporate Governance Hume Occasional Paper No 35 (Edinburgh: The David Hume Institute, 1992); Main, O'Reilly and Crystal CEO Pay and Corporate Governance University of Edinburgh Department of Economics Discussion Paper Series, May 1992; Gregg, Machin and Szymanski ‘The Disappearing Relationship Between Directors’ Pay and Corporate Performance' (1993) B Journal of Ind Rels 1

3 These include the events at BCCI, Maxwell, Polly Peck and Queens Moat Houses.

4 See, for example, Institute of Chartered Accountants of England and Wales (ICAEW) The Changing Role of the Non-Executive Director (1991); Institute of Chartered Accountants of Scotland (ICAS) Making Corporate Governance More Effective (1990); ICAEW and ICAS The Future Shape of Financial Reports (1991); Institute of Chartered Secretaries and Administrators Good Boardroom Practice: A Code for Directors and Company Secretaries (1991); PRO NED Ltd A Code of Recommended Practice on Non-Executive Directors (1987); ISC The Role and Duties of Directors: A Statement of Best Practice (1991); ISC The Responsibilities of Institutional Shareholders (1991).

5 More fully, the ‘Committee on the Financial Aspects of Corporate Governance’.

6 The CG Project is published as Principles of Corporate Governance: Analysis and Recommendations (St Paul, Minnesota: ALI, 1994).

7 See Part II, s 2.01, ‘The Objective and Conduct of the Corporation’ which provides that ‘…a corporation should have as its objectives the conduct of business activities with a view to enhancing corporate profit and shareholder gain’.

8 OJ C240 1983. For subsequent amendments, see OJ C7 1991.

9 Pursuant to the Company Directors Disqualification Act 1986.

10 Examples include the award of long service contracts (Companies Act 1985, s 319) and substantial property transactions (Companies Act 1985, s 320).

11 See Finch, Company Directors: Who Cares About Skill and Care?’ (1992) 55 MLR 179Google Scholar.

12 See the data referred to in the CG Project, Reporter's Note to s 3A.01.

13 See, for example, PRO NED Remuneration Committees: A Survey of Current Practice (undated) and PIRC Ltd The Committee on the Financial Aspects of Corporate Governance: Current Compliance with the ‘Code of Best Practice’ Among FT-SE 100 Companies (1992) both of which look at pre-Cadbury practice.

14 See Reporter's Notes to ss 3.05. 3A.04 and 3A.05.

15 See Collier Audit Committees in Large UK Companies (London: Research Board of ICAEW 1992) and PRO NED Remuneration Committees (undated).

16 See Gilson and Kraakman ‘Reinventing the Outside Director: An Agenda for Institutional Investors’ (1991) 43 Stanford L Rev 863.

17 In the US context, see Larsch Pawns or Potentates: The Reality of America's Corporate Boards (Boston, 1989), who found that 63% of all board members surveyed were Chief Executive Officers of other corporations.

18 See Finch, op cit n 11.

19 [1990] 1 All ER 568.

20 On the role of the accountancy profession in the debate over corporate governance and company law reform, see Freedman, Accountants and Corporate Governance: Filling a Legal Vacuum’ (1993) 64 Google Scholar Political Quarterly 285.

21 Including the Institutional Shareholders' Committee, the London Stock Exchange, the Law Society, the Institute of Directors, the Hundred Group of Finance Directors, the CBI, the London Business School, the Financial Reporting Council, KF'MG Peat Marwick and the ICAS.

22 Report of the Committee on the Financial Aspects of Corporate Governance (London: Gee and Co, 1992)

23 Other companies are encouraged to meet its requirements; see para 3.1 (Report). This coverage, which pays no regard to the size of the company or the pattern of shareholdings therein, might be contrasted with the more discriminating application of the CG Project:

24 See Finch ‘Board Performance and Cadbury on Corporate Governance’ [1992] JBL 581 and Freedman, op cit n 20.

25 Such matters included, inter alia, ‘(a) the responsibilities of executive and nonexecutive directors for reviewing and reporting on performance to shareholders and other financially interested parties …; (b) the case for audit committees of the board, including their composition and role; (c) the principal responsibilities of auditors and the extent and value of the audit; (d) the links between shareholders, boards and auditors…’

26 The ‘Outline for a Project on the Structure and Governance of Corporations’ 13, May 1978 is filed as Appendix 1 to the Minutes of 164th. Meeting of the ALI Council, 16 May, 1978. An ALI project on ‘Business Associations’ had been commenced in 1924, and three Tentative Drafts were produced, in 1928, 1929 and 1932, but it was abandoned thereafter, partly because of concern at the likely costs and partly because of the difficulties of producing a Restatement in an area of law already dominated by statute. See Lewis History of the American Law Institute and the First Restatement of the Law (ALI 1945)

27 On the background to the project, see generally Seligman ‘A Sheep in Wolfs Clothing: The American Law Institute's Principles of Corporate Governance Project’ (1987) 55 Geo Wash L Rev 325; Perkins ‘The Genesis and Goals of the ALI Corporate Governance Project’ (1987) 8 Cardozo L Rev 661.

28 For a brief overview of these, see Seligman op cit n 27, pp 333–336, and Baldwin Conflicting Interests: Corporate Governance Controversies (Massachusetts: Lexington Books, 1984) esp ch 6.

29 Perhaps the best known of these shareholder campaigns are those waged by the Medical Committee for Human Rights (against Dow Chemical Company's manufacture of Napalm used in the Vietnam war) and by Campaign GM. See generally Nader, Green and Seligman Taming the Giant Corporation (New York: Norton & Co, 1976) ch 1; Baldwin op cit n 28, ch 5; Stevenson ‘The Corporation as a Political Institution’ (1979) 8 Hofstra Law Review 39.

30 See Baldwin op cit n 28 ch 7.

31 See Cary ‘Federalism and Corporate Law: Reflections upon Delaware’ (1974) 83 Yale L J 663, and more recently, Karmel ‘Is It Time For A Federal Corporation Law?’ (1991-1992) 57 Brooklyn L Rev 55.

32 Indeed, federal bills were introduced by Senator Metzenbaum (Protection of Shareholders' Rights Act of 1980) and Congressman Rosenthal (Corporate Democracy Act of 1980), but neither was enacted.

33 The ALI was formed in 1923, by a group of American judges and academic and practising lawyers, ‘to promote the clarification and simplification of the law and its better adaptation to social needs, to secure the better administration of justice, and to encourage and carry on scholarly and scientific legal work.’ See Hull ‘Restatement and Reform: A New Perspective on the Origins of the American Law Institute’ [1990] Law and History Rev 55.

34 Its decision to do so followed four symposiums on corporate governance organised jointly with the American Bar Association (‘ABA’) and the ALI-ABA Committee on Continuing Professional Education. The proceedings of these symposiums are collected in Schwartz (ed) Commentaries on Corporate Structure and Governance (Philadelphia: ALI, 1979).

35 Perkins op cit n 27, p 664. See also Eisenberg ‘An Introduction to the American Law Institute's Corporate Governance Project’ (1984) 52 G Wash L Rev 495.

36 There are seven Parts in total. They include: I Definitions; II The Objective and Conduct of the Corporation; IV the Duty of Care and the Business Judgment Rule; V the Duty of Fair Dealing; VI Transactions in Control and Tender Offers; VII Remedies.

37 See also Schwartz' comments in ‘Genesis: Panel Response’ (1987) 8 Cardozo L Rev 687, at 689, ‘The ALI may well have been perceived by them [business groups like the Business Roundtable] as a stalking horse, but a stalking horse against a no-longer existing foe. Now the stalking horse was itself beginning to become a threat, and so the attitude of some of those affected by certain ALI proposals turned against it.’

38 See, for example, its two publications: Statement of the Business Roundtable on the American Law Institute Proposed ‘Principles of Corporate Governance and Structure: Restatement and Recommendations’ (February 1983) and Comments of the Business Roundtable Concerning the American Law Institute Corporate Governance Project (May 1984).

39 See eg Sigler (Chair of the Business Roundtable's Corporate Responsibility Task Force): ‘It's a ludicrous imposition of an unworkable method by a bunch of people who don't know anything about it… I find it appalling arrogance that they think they can vote on how America is managed.’ Quoted in Seligman, op cit n 27. p 326. See also Andrews, ‘Corporate Governance Eludes the Legal Mind’ (1983) 37 Univ of Miami L Rev 213.

40 See Shapiro ‘Corporate Governance’ in Williams and Shapiro Power and Accountability: The Changing Role of the Corporate Board of Directors (New York: Carnegie-Mellon University Press, 1979); Kripke ‘The SEC, Corporate Governance, and the Real Issues’ (1981) 36 The Business Lawyer 173. For a more recent and healthy diagnosis of US corporate governance, see The Business Roundtable ‘Corporate Governance and American Competitiveness’ (1990) 46 Business Lawyer 241.

41 See ABA Committee on Corporate Laws, Section of Corporation, Banking and Business Law, ‘Corporate Director's Guidebook’ (1978) 56 Business Lawyer 1595.

42 See Business Roundtable Statement on the Role and Composition of the Board of Directors of the Large Publicly Owned Corporation (1978); Andrews ‘The Roundtable Statement on Boards of Directors’ (1978) Harvard Business Review, 24.

43 The following provisions were previously mandatory, insofar as they applied to large PHCs: s 3A.01 (Composition of the Board); s 3A.03 (Functions and Powers of Audit Committees); s 3A.04 (Nomination Committee).

44 Defined at 1.31 as corporations with 500 or more record holders of their securities and at least $5 million or more of total assets.

45 See s 3.02.

46 See, for example, paras. 1.8. 4.1 and 4.3 (Report).

47 Para 1.1 (CBP).

48 Para 1.4 (CBP).

49 Para 4.24 (Report). These include material acquisitions and disposals, and company policy on investments, capital projects, authority levels, treasury policies and management policies.

50 See s 3A.01(a). A ‘large PHC’ is defined at 1.24 as a corporation with at least 2,000 record holders of securities and at least $100 million in total assets.

51 Section 3A.01(b).

52 Ie large PHCs with a controlling shareholder or any small PHC.

53 These include employment by the company (now or within the past two years), membership of the family of an officer or senior executive so employed by the company and significant trading or professional relationships with the company.

54 Para 1.3 (CBP). Para 4.11 (Report) notes that all companies will need at least three non-executives if they are to meet Cadbury's recommendations about the composition of sub-committees of the board.

55 Para 2.2 (CBP).

56 Ibid.

57 See para 4.30 (Report).

58 The Report (para 4.8) places the onus on chairmen to ensure NEDs enjoy the necessary information.

59 See s 3.05 For other PHCs, it is recommended as a matter of good corporate practice — see s 3A.02.

60 The details of the ‘Functions and Powers’ of the audit committee (whether a mandatory or voluntary one) are again merely a matter of recommended corporate practice—see 3 A.03.

61 See paras 5.01-5.37 (Report), which contain a variety of comments, analysis and recommendations, including some of the few recommendations for legislative reform in the Report.

62 See para 4.3 (CBP).

63 See, for example, paras 4.4-4.6 (CBP). Detailed guidance is to be issued on the form which the directors' report on the company's internal controls should take. Drafting that guidance, however, has proved difficult: see, Marshall ‘Internal controls plan flawed’ (1994) Independent, 11 January, p 30.

64 Note the linkage between this provision and s 3A.05, which requires the compensation of directors and senior executives to be fair to the company, or to be authorised by disinterested directors.

65 See para 3.3 (CBP).

66 This structural requirement is complemented by two further recommendations: that there be greater disclosure of the constituent parts of the directors' total remuneration package (para 3.2 (CBP)) and that shareholder approval be required for directors’ service contracts exceeding three years (para 3.1 (CBP)). Currently, it is only contracts in excess of five years which require such approval: see the Companies Act 1985, s 319.

67 See, for example, Main and Johnston op cit n 2, who conclude (at p 37): ‘Remuneration Committees and, by extension, corporate governance in general can only operate in the shareholders’ interest if there are available a sufficiency in quantity and quality of outside directors on the Board'.

68 See para 1.2 (CBP).

69 See for example Pensions Investment Research Consultants Ltd The Committee on the Financial Aspects of Corporate Governance: Current Compliance with the ‘Code of Best Practice’ among FT-SE 100 Companies (July 1992), which found that the roles had been split in 79% of the companies surveyed.

70 See, for example, the proposal of Gilson and Kraakman, op cit n 16.

71 One suggestion, for example, might be a ‘corporate strategy committee’, with a remit to oversee the company's long-term strategy. Besides representing the interests of shareholders in sound long-term planning, it might also do something to address the concerns about shareholder pressure for ‘short-termism’.

72 This will be more true of Cadbury, which is limited to ‘listed companies’, than the CG Project, whose definition of PHC could include some companies lacking an effective share market.

73 For an overview of the relevant literature, see Parkinson Corporate Power and Responsibility (Oxford: Clarendon Press, 1993). pp 184–188.

74 Quite apart from this disciplinary effect on management, such publicising of companies' governance structures should at least make decisions to invest in companies with ‘non-Cadbury’ structures more informed.

75 See, for example, Company Reporting Limited's journal, Company Reporting: A Monthly Review of Financial Reporting Practice. There is an overlap here with the activities of institutional shareholder associations in both the UK and the US which monitor corporate governance compliance: see the associations cited at n 81 and the text therewith.

76 See para 12.43(j) of the Listing Rules.

77 Para 3.7 (Report) requires directors to ‘state in the reports and accounts whether they comply with the Code and identify and give reasons for any areas of non-compliance.’

78 See Hirschman Exit, Voice and Loyalty (Cambridge, Mass: Harvard University Press, 1970); Hirschman ‘“Exit, Voice, and Loyalty”: Further Reflections and a Survey of Recent Contributions’Social Science Information vol 13(1), 7

79 Institutional activism was hardly helped, of course. by the experience of Prudential in its litigation over Newman Industries. See Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 All ER 354.

80 See for example Jackson ‘The Institutions get Militant’ FT 11 June 1991, p 18; Cohen and Urry ‘Institutions Demand Fair Shares for All’ FT 30 April 1992, p 23; Martin ‘Life Gets Tougher at the Top’ FT 30/31 January 1993; Lynn ‘Stopping the Gravy Train’ Sunday Times, 13 June 1993 (reporting on Postel's attack on rolling service contracts in excess of 12 months). From the US, see Zanglein ‘Who's Minding Your Business? Preliminary Observations on Data and Anecdotes Collected on the Role of Institutional Investors in Corporate Governance’ (1992) 10 Hofstra Labor Law Journal 23 and Black ‘The Value of Institutional Investor Monitoring: The Empirical Evidence’ (1992) 39 UCLA Law Rev 895

81 The NAPF's ‘Corporate Relations Service’, which provides its subscribers with a guide to resolutions at forthcoming General Meetings, should aid this process, and compares to similar developments in the US. See, for example, the services of Investor Responsibility Research Center Inc and Institutional Shareholder Services Inc, which both provide information, advice and administrative assistance in connection with the proxy voting process.

82 Again, the literature here is too voluminous to cite in full. A selection includes: Conard ‘Beyond Managerialism: Investor Capitalism?’ (1988) 22 University of Michigan J of L Reform 117; Sommer ‘Corporate Governance in the Nineties: Managers vs Institutions’ (1990) 59 Cincinnati L Rev 357; Black ‘Agents Watching Agents: The Promise of Institutional Investor Voice’ (1992) 39 UCLA L Rev 811; Black ‘The Value of Institutional Investor Monitoring: The Empirical Evidence’ (1992) 39 UCLA L Rev 895; Buxbaum ‘Institutional Owners and Corporate Managers: A Comparative Perspective’ (1991) 57 Booklyn L Rev 1; Longstreth ‘Reflections on the State of Corporate Governance’ (1991) 57 Brooklyn L Rev 113; Roe ‘Political Elements Behind Insurance Companies as Passive Investors’ Center for Law & Economic Studies Columbia University School of Law, Working Paper 87; Rock ‘The Logic and (Uncertain) Significance of Institutional Shareholder Activism (1990-91)’ 79:1 Georgetown Law J 445.

83 Alternative courses of action include simply doing nothing, or selling one's shares. For an institution, there may be substantial difficulties in disposing of a large block of shares without causing a substantial drop in the share price.

84 In addition, much of the US literature makes a good deal of legal inhibitions to shareholder activism, concentrating in particular upon proxy and SEC rules which inhibit inter-shareholder communication and co-operation; see Black ‘Shareholder Passivity Re-examined (1990) 89 Michigan L Rev 520, Black ‘Agents Watching Agents: the Promise of Institutional Investor Voice’ (1992) 39 UCLA L Rev 811; Coffee ‘Liquidity versus Control: The Institutional Investor as Corporate Monitor’ (1991)91 Colum L Rev 1277.

85 See in particular, the ISC's The Responsibilities of Institutional Shareholders op cit n4.

86 See paras 6.10-6.12 (Report). In relation to the CG Project, there is only a brief treatment of the potential contribution of institutional shareholders. The CG Project accurately describes their marginal historical contribution, but by implication also tends to downplay their likely future role. See para 1 to ‘Introductory Notes to Parts III and III-A.

87 Whilst greater institutional activism might solve some of the problems of regulating managerial power, it might also create new ones. In many ways large institutions and small shareholders do have the same interests in regard to the company, and institutional activism will advance those shared interests. But this will not inevitably be so, and insofar as shareholder activism does increase, then more attention may need to be given in the future than has yet occurred as to how such conflicts are to be managed.

88 Whether, in the case of the CG Project, the antagonism between the ALI and some sections of the business community, noted earlier, will undermine this normative force, remains to be seen.

89 There is a further development here whose effect is uncertain but which might work against activism. That is the practice of indexing, where a shareholder's portfolio simply mirrors that of the chosen index and where the investor aims to do no more than match the index. Intervention which improves a portfolio company seems pointless if the index is improved to the same extent. However, against this, it might be argued that, under indexing, improvements are secured only by improving the performance of the index as a whole, and that is best achieved not by focusing ex post upon the individual company, but by improving the structure under which all companies operate and are managed.

90 See for example Davies ‘Institutional Investors in the United Kingdom’ in Prentice and Holland (ed) Contemporary Issues in Corporate Governance (Oxford: Clarendon Press, 1993).

91 See Part IV of the CG Project. The activities required of directors to meet that duty of care (see s 4.01) are to be determined by reference to ‘the functions of directors’ including the definition of their monitoring role described in s 3.02(a).

92 It is theoretically possible that actions by minority shareholders to enforce legal norms on board composition etc could be brought under section 459 of the Companies Act 1985. Against this, it must be noted that few actions thereunder concerning public companies have succeeded to date and the court's preferred remedy — the buy-out — would hardly be the most appropriate solution.

93 See Maw, Lord Lane of Horse11 and Craig-Cooper Maw on Corporate Governance (Aldershot: Dartmouth Publishing Co Ltd, 1994) ch 13.

94 The Cadbury Committee is itself monitoring reactions to its recommendations, and a successor body is to be appointed in 1994 to review progress: see para 1.4 (Report).