This is an extract of our Uk Corporate Governance Code 2016 document, which we sell as part of our Company law Notes collection written by the top tier of Oxford students.
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UK Corporate Governance Code 2016
Gower Chapter 14: The Board
The Role of the Board
UK Corporate Governance Code 2016:
Every company should be headed by an effective board, which is collectively responsible for the success of the company
Code then goes on to explain what these responsibilities include:
Set company's strategic aims
Ensuring necessary financial and human resources are in place
Review management performance
Set company values and standards
Ensure obligations to its shareholders and others are understood and met
This Code only formally applies to public companies with a Premium Listing of equity shares on the LSE but is nevertheless indicative of the board's far-reaching powers and responsibilities in all companies.
Unlike civilian systems, however, the division of power between shareholders and the board is often a question of private ordering, representing the partnership origins of
British company law.
The Default Provisions of the Model Articles
Hard to generalise about the patterns of division between board and shareholders in practice but model articles can offer some guidance. For both public and private companies, the default provision is the same, and it is one that gives much power to the board:
Subject to the articles, the directors are responsible for the management of the company's business, for which purposes they may exercise all the powers of the company
This reference to 'management' in abstract may seem inappropriate for large public companies where the board could not possibly deal with all aspects of management but this is because Art 5 of the Model Articles for Public Companies provides for a broad power to delegate management functions to others, meaning higher-level questions of strategy as laid out in the Code are a more accurate reflection of what such boards do.
For private companies, however, it is sometimes possible for the board to really oversee all aspects of management directly. In quasi-partnerships, a small company would be free to displace the default rules through bespoke articles by reserving some matters to a unanimous vote or to involve greater shareholder involvement. For both public and private companies, therefore, the Model Articles are just the starting point, with the needs of each type pointing in different directions.
The Power of the Board - the Legal Effect of the Articles
The Board and Shareholders
Legal effect of the articles - key question: is the relationship between the shareholders and the board one of agency or do the articles provide for a constitutional division of powers? Agency is about power-sharing not power-giving (meaning principal may revoke agency at will) but this is not how companies work, even though articles could actually provide for this possibility.
Until end of 19th century - it was assumed that the general meeting was the supreme organ of the company and the board was merely the agent of the members. Directors could therefore not block a general meeting whose purpose was to appoint a committee which would reorganise the running of the company in Isle of Wight Railway v
However, Automatic Self-Cleansing Filter Syndicate Co v Cuninghame  made it clear that the division of powers between board and members was purely a question of the construction of the articles. The general meeting could not interfere with powers vested in the board - members thus could not force sale agreement by ordinary resolution.
This was firmly accepted following Quinn & Axtens v Salmon  - members cannot interfere with a decision of the directors unless they are acting contrary to the Act or
Greer LJ per Shaw & Sons (Salford) Ltd v Shaw  expresses the modern doctrine:
A company is an entity distinct alike from its shareholders and its directors. Some of its powers, may, according to its articles, be exercised by its directors, certain other powers may be reserved for the shareholders in general meeting. If powers of management are vested in the directors, they and they alone can control the exercise of the powers. The only way in which the general body of shareholders can control the exercise of the powers vested in the articles in the directors is by altering their articles, or, if opportunity arises under the articles, by refusing to re-elect the directors of whose action they disapprove.
They cannot usurp the powers which by the articles are vested in the directors any more than the directors can usurp the powers vested in the articles in the general body of shareholders.
Scott v Scott : accordingly, GM resolutions which were instructions to make loans were nullities as the relevant power had been delegate to the directors.
Since 1985, Model Articles have further enunciated this position. Grant of authority to the board thus 'subject to the articles' and there is a specific section dealing with members' reserve powers (Art 4) - by special resolution, members may instruct directors to take or not to take a specified action (ie equivalent to one-off change of constitution).
However, note S168 gives shareholders the power to remove directors by ordinary resolution so shareholders do have the power to force certain decisions indirectly. The Board and Senior Management
There has not been the same level of legal controversy with senior management and the board as senior management can be sacked by the board and senior management has no formal position in the legal structure of the company. Although there are no restrictions on firing managers as a matter of company law, this would have labour / contract law implications. Note that the Code tries to put the MD/CEO within a system of accountability to the Board.
Default and Confirmation Powers of the GM
If for some reason the board cannot exercise the powers vested in them, the GM can do so:
Deadlock of the board - Baron v Potter 
Where there were no directors - Alexander Ward & Co v Samyang Navigation Co
Where effective quorum could not be obtained - Foster v Foster 
Directors were disqualified from voting - Irvine v Union Bank of Australia (1877)
Massey v Wales (2003): shareholders may take the substantive decision only where the articles do not give them some effective way of reconstituting the board so as to remove the impediment to board decision-making - an overly-wide reserve power would upset the balance laid down in the AoA
Where Directors have exercised a power reserved to the GM, it can be made effective by ratified at the GM by ordinary resolution: Grant v UK Switchback Rys (1888).
Directors may refer any matter to the GM too - an act of directors which would otherwise be voidable for eg breach of fiduciary duty could be made effective by the GM:
Bamford v Bamford , as long as:
The act is within the powers of the company
The meeting acts with full knowledge
The minority is not oppressed
Unanimous Consent of the Shareholders
Shareholders may bind company through unanimous agreement wrt decisions within their powers - meaning all shareholders not just those at GM.
This is a common law rule which helps small businesses take effective decisions without the need to hold a formal meeting.
Lord Davey per Salomon v Salomon additionally suggests that this rule could apply to shareholder unanimous decisions regarding board matters but this has not been tested.
Company Law Review recommended codifying this rule and that is should apply
'regardless of any limitations in its constitution' but the Government decided against this while preserving the common law rule.
Unanimous consent has no issue of minority oppression, which may occur if the constitution is ignored in other situations. Such an approach entrenches the primacy of shareholders but as shareholders are not subject to the same restrictions as directors,
this may result in the prejudicing of third party rights like those of creditors.
The Mandatory Involvement of Shareholders in Corporate Decisions
Basic rule is private ordering but there are some situations where the shareholders have to be involved and can even move a motion of their own accord.
These primarily concern issues which would affect the contractual or legal rights of shareholders. These include:
Alteration to AoA
Alteration of company type eg private to public
Decisions to issue shares (S549), to disapply pre-emption rights on issuance
Decisions to reduce share capital, re-purchase shares, redeem or re-purchase shares out of capital in the case of private companies or give financial assistance in the case of private companies
Alternations to the class rights attached to shares - S630
Adoption of schemes of arrangement - S895
Voluntary winding up - Insolvency Act 1986 S84
Another area where this applies where direct shareholder approval is needed to support good corporate governance / avoid conflicts:
Appointing auditors - Pt 16 Ch 2 CA
Certain transactions entered into by Directors and their associates with the company - Pt 10 Ch 3
Ratification of director's outside corporate opportunities
Defensive measures to be taken once a takeover offer is imminent - now part of the City Code on Takeovers and Mergers
Listing rules provide a third basis for direct shareholder approval:
For a Premium Listing on LSE, size of transaction may trigger this requirement
Class 1 acquisitions and disposals, or any reverse takeovers require shareholder approval
o Size of transaction > 25% size of company
Viz any of the four financial ratios of profit, gross assets, consideration and gross capital
o Transaction size >100% company
Where transaction would result in fundamental change to company business, board composition or voting control
Mandatory Functions of the Directors
These are numerous and are scattered throughout the Act. Mostly, they pertain two the production of annual accounts and communications, and the regular administration of
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