In my paper I would like to discuss some stakeholder-perspectives connected to corporate governance. Although the evidence of corporate influence in almost any sphere of life is noticable, it is still difficult to define which of those groups can be regarded as corporate stakeholders. Furthermore, how stakeholders can represent their interests is often problematic to define. As an example: there are effects of corporate actions that influence nature, global warming or pollution. Accordingly, every sphere of interest can be declared as stakeholder interest, but only by a very remote analogy. Actually in corporate governance only those groups can be considered as stakeholders which can represent themselves as legal subjects. This is the main reason why the legal environment of corporate governance is so important. Although the areas of legal regulatory frameworks are very similar in the EU and in the USA, the orientation of the rules can be very different.
Who are to be considered as stakeholders within the corporate sphere? Legal and economics theory specialist literature finds highly appropriate answers to the above question. The majority of such answers define stakeholders, as affected persons, members of different spheres of interest whose position might be affected by the operation of companies from various aspects, even if they do not exercise ownership rights in such companies. Therefore, stakeholders are not only shareholders and investors. They may be consumers, creditors, managers and employees, moreover the concept of stakeholder could be used in an even more extensive sense.
In Anglo-Saxon corporate governance practice for a long time shareholder interest (shareholder value) had primary importance, which manifested in the maximization of share prices. The strengthening of the stakeholder approach is linked with the name of Professor R. Edward Freeman, who in his work titled Strategic Management: A Stakeholder Approach defines the scope of the persons qualifying as stakeholders, and makes proposals as to the means by which the management can guarantee the protection of their interests. When classifying the stakeholders of the corporate sphere, specialist literature defines both internal and external stakeholders. From our point of view, the affected persons whose legal entity is considered important in respect of the internal legal relationships of the company qualify as internal stakeholders. This category includes the owners (member, shareholder, investor), the directors, the management and the employees. External stakeholders can be defined as external affected persons, listing within this category e.g. creditors, state interest and public interest, or consumers.
We consider that the term "stakeholder" is to be used only if we can determine the scope of those persons whose affectedness is evident. For example, it is a questionable achievement of globalization that the economic sphere has a strong impact on the environment and climate change. Consequently, the operation of companies may, to a certain extent affect everyone's life. Nevertheless, it would be self-righteous to try to find answers to the question whether we may, in this context, consider as stakeholder all natural persons, or all legal persons. It is obvious that in lack of the necessary legal guarantees it would result in the emptying of the term "stakeholder", if we tried to trace forced links between the various legal institutions and the presumed or actual stakeholders of the corporate sphere. Instead, we intend to examine whether the actual legal institutionary background of stakeholder protection is sufficiently effective in the US, Europe or Hungary. Although the examination of the legal background could be comprehensive, we herein focus our attention on the legal institutions of corporate governance. The above legal institutionary background can be interpreted, on the one hand, on the basis of mandatory corporate and capital market legal provisions, while on the other hand, on the basis of the recommendations specified by the various stock exchanges as the rule of conduct for public trading and the condition of registration, in accordance with the directives and recommendations of the European Union. However, the scope of our examination does not, or only marginally extends to legal fields not included within the institutionary system of corporate law, such as the rules of competition law, consumer protection, and advertising law. Therefore, we regrettably cannot discuss herein in detail the topic of consumers as stakeholders.
The two above referenced bodies of rules (legal provisions and recommendations) jointly constitute the regulatory background of corporate governance, even if the latter body of rules can not be considered in a narrower sense, as provisions of law. In this respect, the scope of stakeholders applies to those legal entities who obtain protection (guarantee) pursuant to the provisions of the aforementioned rules, while the above scope could be interpreted even more
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extensively only through the amplification and updating of the current body of rules. The examination of the effective regulatory background is especially useful, since we may draw conclusions in respect of missing guarantees by way of such examination.
In view of the above described considerations, the issues of stakeholder protection are discussed herein primarily with respect to the following groups: Members exercising ownership rights are deemed to be internal stakeholders: shareholders, executive officers (directors), the management and the employees. As regards external stakeholder interests, we focus on creditor, state and public (in general) interest.
The status of investors is highly intriguing. As we will see, investors may be stakeholders irrespective of their ownership rights. In respect of the exchange gain of their shares, it is not only the operation of their own company that has relevance, but in the market they should also consider systematic risks that are not related to their capacity as owners. Moreover, public interest should not be ignored either; in fact the protection of public interest through certain regulatory provisions is a primary objective of legal politics. Taking into consideration the great number of interests listed herein, our analysis is to concentrate on essentials and does not cover all issues.
In the past years the image of corporate governance in the US has been greatly influenced by the Sarbanes-Oxley Act, which was the legislative response[1] to the 2002 corporate scandals[2] (Enron, Worldcom).[3] Within its regulatory scope, the above Act stipulates strict provisions for the purpose of increasing transparency. The accounting reform for companies is based on the experience gained from the 2002 scandals, however, it is to be noted that auditing left much room for improvement also at the time of the worsening of the 2007-2008 financial crisis. In addition to the above mentioned, the Act is aimed at the strengthening of the institutions of corporate governance by developing the internal control system of companies and increasing the severity of the criminal liability of executive officers.
The EU through its directives and recommendations strives to develop on a broader scale the institutionary system of corporate governance. The legislators of the member states fall into line with such regulations through the integrating institutionary system of corporate and capital markets law (and other branches of law), while the recommendations at member state level concerning publicly traded companies (Combined Code on Corporate Governance,[4] Deutsche Corporate Governance Kodex,[5] Vienot Report[6]), the Hungarian Companies Act of 2006 and the 2002 recommendations for corporate governance issued by the Budapest Stock Exchange (BÉT) also follow the trends of the EU regulation.
In the present study we cannot provide a comprehensive description of all legal institutions related to the protection of stakeholders within the referenced regulatory system. Therefore, we strive to specify the focus points that may raise the most topical issues. Accordingly, certain institutions may require a more thorough examination of either the US, or the European regulations, or in some cases the examination of the Hungarian legal regulations may prove to be the most interesting.
Indisputably, stakeholders can exert substantial influence on the process of business law legislation, which fact in itself proves that their role can not be left out of consideration in corporate governance practice. Below we illustrate by a few examples that stakeholders (especially managers and business organizations) can exert substantial influence in the cases at issue.
In the US at the time of the drafting of the Sarbanes-Oxley Act (in 2002) several business organizations were also interested in the adoption of the new regulation that was more favorable for them.[7] Naturally, the stages of legislation were accompanied by party politics bargaining and compromises. However, two major business organizations strongly expressed their opinion on the content of the rules to be enacted. The American Chamber of Commerce gathers smaller undertakings than the Business Roundtable, which represents large companies of solid capital. It is a well-known fact that the Act was inspired by the 2002 accounting frauds, which were committed primarily within the scope of operation of larger companies. However, the provisions of the Act apply with general effect to all companies the shares of which are traded at the US stock exchanges. Therefore, the American Chamber of Commerce rightfully expressed its concerns: the frauds were committed by the large companies, however, the consequences (e.g. more costly internal control obligation) affected also smaller companies. Moreover, the auditors that were also involved in the frauds could obtain new titles for assignments as a result of increasing the severity of accounting rules. Whereas, the Business Roundtable was clearly interested in demonstrating that the largest companies agreed with the severe regulations, and were not among those companies
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that displayed negligent corporate governance practice.
In Europe the majority of corporate governance recommendations were not prepared upon governmental initiative, but as a result of the work of expert committees. An excellent example for the above practice is the English Combined Code on Corporate Governance, in the drafting of which the Cadbury, Greenbury, or Hampel Committee played a prominent role. The members and heads of the committees were also experienced participants of business life, who could consider the drafting of the regulations from a stakeholder point of view. For example, the Hampel Committee made unsuccessful attempts at restoring the scope of authority of executive officers, which authority was limited as a result of previous committee activities.
In 2007 the regulation known as Lex MOL was adopted in Hungary, which regulation was aimed at the protection of companies of strategic importance in respect of public supply through the amendment of other corporate and capital markets regulations. The name is associated with the event when, in the summer of 2007, the Austrian ÖMV made an attempt to acquire, by way of a public purchase offer, MOL shares at the stock exchange. Lex MOL renders more difficult the hostile takeover of the companies falling within the scope of the Act. For example, the Act makes such transactions subject to the approval of the general meeting of the purchasing party, and ensures that the target company may purchase a larger proportion of own shares (thereby also decreasing the possibility of a successful takeover). The regulation was based on a political consensus, in which several experts suspected the lobby force of the managements controlling the leading Hungarian companies. The provisions of Lex MOL rendered the removal of the management far more difficult (as it is generally required for protection against takeovers) than the legal provisions effective prior to the adoption of the Act.
The nature of corporate governance strongly depends on the fact whether the company is operated according to the one-tier board of the Anglo-Saxon model (single board), or the two-tier board of the continental German model (board of directors and supervisory board). There is a significant structural difference between these two models, although the substantial (material) issues of governance are usually person- oriented. In other words, the appropriate form of governance is to be filled with the appropriate content.
The need for a normative choice between the two systems is constantly recurring in specialist legal literature. In this case, by normative choice we mean the issue whether, it can be decided, taking into consideration their differences, which of the two models is more effective.
Although, lead by professor Paul L. Davies, specialist literature actively examined whether the two models were coming closer to, or moving away from each other, regulation both at member state and EU level clearly separates the two models, while in the US the possibility of the gaining ground of the two-tier model has never been seriously raised.[8]
It is to be noted that from the point of view of legislators, the most convenient solution seems to be the simultaneous (parallel) application and permission of both models. This concept is reflected in the EU regulation, to the extent that the control of Societas Europae can be provided both in the one-tier and the two-tier system. In respect of the regulatory practice at member state level, Hungary is an excellent example, where the Company Act of 2006 also allows for a choice between the two models, simultaneously offering them as potential solutions.
In contrast, the United Kingdom and Germany, considered as the countries of origin of the two governance models, still insist on keeping the traditions: according to the recommendations of the Combined Code on Corporate Governance, the establishment of a two-tier board model is excluded in the same manner as the possibility of the establishment of a one-tier board model is excluded under the German Aktiengesetz and Deutsche Corporate Governance Kodex.
In respect of the protection of stakeholders, it needs to be emphasized that the German two-tier model is based on the earliest version of the stakeholder theory. German corporate law considers corporations primarily as the articulation of interests, and not as capital markets constructions (contrary to the AngloSaxon, in particular the US concept). Consequently, the supervisory board operating beside the German board of directors as an individual corporate body, serves not only the protection of the owners, but also the protection of public interest, the tradition of which dates back to the 1870's, the emergence of the united Germany.[9]
As another characteristic feature of the German model, a significant group of stakeholders, namely
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the employees, need to be represented in the supervisory boards. According to the effective German regulation, subject to the size of the company, such representation could account even for 50% of all delegates, with the proviso that the chairman of the supervisory board may not be an employee delegate. The chairman's vote counts for two votes, therefore in cases of strained decision making, the persons delegated by the shareholders will always have the necessary 50% plus one vote.[10]
The above model for the representation of stakeholder interests is strongly criticized, since in practice there is a lot of information the owners and the management do not wish to share with the delegates of the employees. This ultimately results in the fact that since the delegates of the employees are members of the supervisory board, the confidential information is not shared with this corporate body either.
It is to be noted that one of the main disadvantages of the mandatory application of the two-tier governance model is that supervisory boards are hardly capable of conducting their supervisory activity during the decision making phase. In other words, their activity is reactive, it brings to light possible abuse and unprofessional business management only subsequently. Naturally, the above cannot be ignored in respect of the establishment of liability, however, this will not change the consequences of negligent governance. In the event that stakeholder interests are injured due to such negligence, and the assets of the company are insufficient to satisfy their claims (insolvency), they may take legal proceedings to enforce their claims merely in the hope of moral victory. The above mentioned has increased significance for creditors, as one of the major groups of stakeholders. International legislation trends strive to include, for guarantee purposes, a growing number of liability rules in the acts on companies. For example, in Hungary the 2006 Act on Business Associations stipulates that in cases threatening with insolvency the management shall proceed in accordance with the interests of the creditors, instead of the interests of the owners. The enforcement in practice of the above regulation is extremely difficult, especially since the managements of continental European companies depend on the goodwill of large blockholders.
In the two-tier board the status of directors and managers, as stakeholders significantly deviates from the Anglo-Saxon practice. Blockholders, as the true masters of capital concentration, may effectively use also informal means to interfere with strategic and executive governance. This frequently happens by way of fully taking advantage of the rights provided to the supervisory board under the provisions of law, that is, the owners control the management through the supervisory board. Not surprisingly, the legal politics considerations of the two-tier board are in fact based on the concentrated shareholding characteristic of continental Europe, which implies the dominant role of the institutional investors. Due to the traditions, the system will surely be applied in the future in those countries where it had been in general use for a long time (Hungary is clearly to be listed within this category, although the Companies Act of 2006 allows also for the application of the one-tier AngloSaxon board). Nevertheless, it is to be noted that the disintegration of large shareholdings may result in the emptying, in respect of content, of the two-tier model (as an early manifestation of the stakeholder approach). At present, such process seems to have already commenced in Germany, effective tax regulations, the need for more diversified portfolios and the increased investor interest in exotic (e.g. Far-Eastern) financial products are all against the keeping of large shareholdings by single owners.[11]
The Anglo-Saxon model of corporate governance is characterized by the employment of a one-tier (monist) board of directors, which performs, as a single body, the management of the company, as well as supervisory functions. Therefore, the directors present on the board are to be divided into two groups: executive and non-executive directors, the latter being responsible for the exercising of supervisory functions.
The board of directors, especially in the US, is considered to be the true master of capital concentration, due to the increased capital markets exposure and the disintegrated shareholding structure. In view of the 2007-2008 financial crisis, we need to emphasize that remuneration issues require increased attention in the case of the Anglo-Saxon model. In the US the companies paying astronomical bonuses despite their negligent financial management caused enormous uproar (the most notorious of them being the scandalous "bonus-gate" transactions of AIG).[12] In response, in the case of the companies provided with state aid, US legislation specified extremely severe (even 90%) tax rates for these bonuses. With view to the comparison of business practice, we may otherwise note that the US remuneration practice results in significantly higher remunerations for directors and managers than either the European or the Japanese practice.
In the ill-famed US corporate scandals (both in 2002[13] and 2008), in addition to the damage caused to the investors, other interests were also injured. In our view, the interests of the majority of stakehold-
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ers could be effectively protected through the same institutions. Whether it is the protection of creditors', employees' interests or the public interest, significant results can be achieved by the enhancement of corporate governance, the increasing of transparency and the effective control of the financial management.
As a result of the development of the institutionary system of corporate governance, the role of various committees gained extraordinary significance in respect of the operation of companies. In the US, the mandatory provisions of the 2002 Sarbanes-Oxley Act stipulate in detail the manner of setting-up and operation of audit committees. Similarly, the setting up and operation of various committees is a frequently discussed issue in the United Kingdom as well. The Cadbury Report (in reaction to the Robert Maxwell corporate scandals) already in 1992 laid great stress on active committee work: the establishment and operation of audit committees, remuneration committees and appointment committees. In 2002 the recommendations of the Combined Code on Corporate Governance naturally followed the previously specified principles of regulation, and were also committed to active committee work.
In the US the statutory regulations, while in the United Kingdom the recommendations provide a favorable framework for the increasing of the efficiency of corporate governance through committee work, however, it is at least as important as the above that the legal framework be filled with the appropriate content. Therefore, it is essential that there be an appropriate number of independent directors among non-executive directors, namely, directors who have no business and economic commitment towards the company. In several cases the independence of the director is a requirement for serving in various committee positions, and increases the possibility that committees may consider the company's affairs from an objective point of view.
The states of continental Europe are somewhat behind the Anglo-Saxon enthusiasm, for instance, in Germany the effective legal framework provides for the conditions of setting up committees, however, in practice such opportunities are frequently missed.
The role of stakeholders may also seem different in the practical application of the two governance models. The idea of the consideration of the interests of stakeholders was never foreign to the German one-tier governance. In respect of the application of the Anglo-Saxon governance model, it has been the subject of endless disputes to what extent should interests other than those of the shareholders, namely the interests of the stakeholders, be considered.
Firstly, we need to mention directors and managers, as stakeholders. They play entirely different roles in the two-tier and the one-tier boards.
The application of the two-tier board frequently implies the subordinate position of the board of directors to the majority shareholders. The solutions characteristics of the states of continental Europe are typically based on a strong relationship between directors and main shareholders. In these cases, informal relationships are of decisive importance, consequently, the board of directors often proceeds in accordance with the wishes of the majority owners. In this respect, the board of directors, as corporate body complies with the requirements of the majority owners also in its composition.
Therefore, one of the most important bases of the development of the two-tier board is the concentrated shareholding characteristic of continental Europe. In such system the true masters of the concentration of capital are the majority shareholders, who can concentrate their votes and achieve their objectives at the general meeting. The members of the board of directors and the supervisory board may serve in their position in the long run, only if they enjoy the confidence of such majority shareholders. Compared with the Anglo-Saxon (and especially with the US) practice, in the case of the two-tier model, the members of the board of directors have much less influence, accordingly their remuneration is also more moderate.
In contrast, in the case of one-tier governance, the role played by board of directors is more decisive in respect of the operation of companies. It is even more characteristic of the US that in lack of concentrated shareholdings, the investors are unable to exercise effective control over the company, therefore the board of directors can be considered the true master of the concentration of capital.[14]
The relationship between the board of directors and investors is not particularly strong, therefore it is essential to specify a common and general objective. In practice, successful performance at the stock exchange is usually considered to be such priority. Investors consider the favorable stock exchange rates of the company's securities as an indicator of good performance, which, in our view, is often a misjudgment. Similarly, the members of the board of directors may be sure that their astronomical bonuses will be approved by the investors at the general
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meeting, only in the case of good performance at the stock exchange.
Good performance at the stock exchange is based on successful financial reports. Consequently, the financial management and its head, the CFO (Chief Financial Officer) has a key role in the executive management of the company. However, the business practice of the past decade has frequently shown that the financial foundations of companies are often unsuitable to influence stock exchange rates to the required extent, therefore reports of fictitious profits, the falsifying of financial reports and creative accounting practices are becoming widespread.[15]
Gatekeepers (auditors, attorneys, etc.) assisting the board of directors and theoretically acting in accordance with the interests of shareholders, also seem to show more willingness to be generous to the advantage of the management, in consideration of large fee amounts.[16]
Finally, it is to be noted that in respect of the rules of liability of executive officers, in 2006 Hungarian corporate law drew upon the legal institutions of both German and Anglo-Saxon corporate law. Accordingly, Hungarian law introduced the institution of discharge of liability, based on the traditions of German corporate law. In the event that the supreme corporate body votes on the granting of discharge of liability to the executive officer, it acknowledges that during the reviewed business period the executive officer has performed his work by giving priority to the interests of the company, thus no subsequent claim may be filed against such executive officer on the above basis. From the institutions of Anglo-Saxon corporate law solvency test was included within the Hungarian corporate law in 2006. Pursuant to this provision, the company's articles of association may specify that the executive officer prepare a written statement to the supreme body, stating that the payment in question does not threaten the company's solvency (or the creditors' interests). The executive officer shall be held liable for damages caused by false statement.
The non-executive directors are responsible for the provision of control functions within the framework of the one-tier board. In the United Kingdom, the recommendations of the Combined Code on Corporate Governance clearly stipulate the scope of their tasks and the necessity of their presence in the board of directors. The non-executive directors have a significant role in the work of boards, but the efficiency of their contribution is often criticized. Such criticism is the most dominant regarding the role of nonexecutive directors in remuneration boards: with view to the present global financial crisis, the issue of directors' remuneration has become very sensitive. In theory, it would be the task of the non-executive members of remuneration boards to exercise some kind of control over the extremely high remuneration rates. However, this is not in such persons' interest, if at another company, in the function of an executive director, such persons also benefits from the maintenance of such high-volume remuneration system. According to the suggestion of Martin Lipton and Jay W. Lorsch, it would be useful if the non-executive directors held meetings separately, and even for a longer period of time. In this case, the executive directors would not affect the forming of an opinion, and the non-executive directors may take up a uniform point of view regarding significant issues, and would be able to defend and represent such point of view at the unified meeting of the board.[17]
In the application of the two-tier board, the status of supervisory board members is controversial. In practice, supervisory boards rarely hold meetings, and the length of such meetings, in an annual average, can also be considered rather short. Nevertheless, the board works on the basis of the information prepared (pre-filtered) by the executive board. Due to this fact, the members of the supervisory board may not undertake to influence the decision-making process in the correct direction, only a subsequent control may be exercised thereupon.[18]
The efficiency may be further decreased by the fact that the legislators usually do not make the appointment of members to the supervisory board subject to any qualification or professional experience. The simultaneous presence of the delegates of shareholders and the delegates of employees also does not support efficient share of information, since it might happen that there is information that the shareholders do not wish to share with employees.
The shareholders are the owners of the company, whose status may significantly vary, depending on the fact if such persons are owners of large share blocks (blockholders), capable of enforcing their interests, or small investors.
Concentrated shareholding is the characteristic of the continental European model, which goes hand in hand with a wide spectrum of options for the share block owners, regarding management of the company. In such system, the role of institutional investors is significant.
Attention needs to be drawn to the fact that the presence of strong share block owners diminishes the importance of investor protection, since such
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persons already are of strong influence. However, it raises the value of a certain field of the legal institution system of investor protection: the importance of the protection of minorities.
European corporate rights follow the general tendency, rendering easier the exercising of minority rights and coinciding with the mentaility of the Lisbon Treaty and the European Charter for Small Enterprises approved in Feira. A legal-technical solution thereof is that the minority protection rights guaranteed in corporate laws may be exercised based on an ownership ratio lower than earlier. During the 2006 codification of the Hungarian corporate law, the exercising of rights (minority rights bound to 10% of votes) may be exercised already from 5% of the votes. A typical solution belonging to the legal institution system of minority protection is the right to convene a general meeting and discuss items on the agenda. This is more of a theoretical than a practical entitlement, because although the supreme body can be convened, at the meeting thereof, the majority may vote against the minority. It is a more significant guarantee than the above, that the minority shareholders may have an auditor examine events of a given business period, or a specific business event. It is also a significant entitlement for minority shareholders, that in certain cases the law ensures that a claim may be initiated in the company's name.
In the case of frittered stock, the situation is different and the protection of investors may gain of much more significance. In the US, the legal politics objective of the Sarbanes-Oxley Act of 2002 was investor protection, based on the auditing reform of companies. For this goal, the Act established a committee operating in the form of a nonprofit corporation (Public Company Accounting Oversight Board - PCAOB), the task whereof is the monitoring of the auditing companies providing accounting services for the companies registered in the United States. Moreover, the Act forbids that auditors provide non-audit services (book-keeping, legal advisory activities, etc.) for the same company whose auditing such auditors perform.[19] This Act lays special emphasis on the work of the audit committees, and implements strict actions regarding the internal control system of companies - and related thereto - the responsibility of executive officers. Further to the above, it forbids corporate loans provided to executive officers and renders more severe the criminal liability of such persons. Infringement of the provisions of this Act has the same legal effect as the infringement of the provisions of the Securities and Exchange Act of 1934. The aim of such measures was to provide investors with a real picture of the operation of the company by way of increasing transparency, so that the investors may decide upon the placement of their financial assets based on accurate information. However, in addition to the appropriate legal regulation of the scope of activity of the individual companies, general protection of the market is also important (by capital market legal instruments), naturally simultaneously with the development of the proper control system. The financial supervisory systems have been strongly criticized in relation to the financial crisis of 20072008. From the investors' point of view, the protection of the market is also important, because such persons do not only take risks as owners, through purchase of shares of a certain company, but also expose themselves to the systematic risks of the market. However, such risks cannot be eliminated solely by their own company's management displaying responsible corporate governance.[20]
The two-tier board applies a demonstrative solution in respect of the protection of employees' interests: the delegates of the employees participate in the work of supervisory boards, along with the delegates of the shareholders. It is interesting though, that using as basis the example of German law, the legal provisions of the states favoring the one-tier board generally do not set criteria, based on which it could be decided which employee is capable of taking such a position. To put it more simply: the taking of such a position is not made subject to any qualification or experience. In this respect, the legal background seems to be most democratic, since the employees may elect their delegates without being bound by any restrictions. However, we have to draw the attention to the fact that more effective representation would be available, if this concept changed. Besides, we hereby wish to refer back to our earlier statement, that within the scope of activity of the supervisory board, the employees do not always enjoy the full confidence of the shareholders. In practice, this means that neither the executive board, nor the owners wish to disclose all the information to a supervisory board in which the employees' delegates are present. This might deepen the basic problem of the two-tier board: the deficit of the flow of information. On the one hand, the executive board certainly does not wish to share all available information with the supervisory board, on the other hand, the delegates of the shareholders also do not wish to share all information available to them with the delegates of the employees. In this respect, the employees as stakeholders only formally receive representation, whereas their presence in the supervisory board results in preventing the enforcement to the necessary extent of other stakeholders' interests.
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The one-tier board, during its development, was never willing to ensure a position for employees' representatives in the board of directors. At the same time (mainly in the United States) there has been a growing pressure on employees to connect their investments to the capital market products of their company. This behavior was interpreted as loyalty towards the company. The purchase of the shares of the employer company creates a defenseless situation for the employees: the possible collapse of the company does not only mean the loss of the employees' job, but also the loss of the value of savings. The company scandals of 2002 provide a sad example: a significant part of Enron employees, encouraged by the management, invested their savings in the company's shares.[21]
There are many legal tools for creditor protection. Naturally, it is also to be considered as creditor protection guarantee, if transparency within the scope of activity of companies can be increased through the means of responsible corporate governance and responsible, mature management can be ensured. Such aspects need not be separately discussed, as the related legal tools have already been described above.
However, we need to emphasize that creditor protection has more concrete institutions, ensured by corporate rights. One of such institutions is the system of corporate law measures related to capital protection, the essence of which is that the specific corporate forms (limited liability company, company limited by shares, etc.) should hold a specific amount of registered capital, and such registered capital is considered as security for the satisfaction of creditor claims. The more limited the members' liability is, the more the possibility to satisfy creditor claims concentrates on the assets of the company. The second corporate law directive (capital protection directive) of the European Union stipulates the regulations regarding the capital protection of companies. The Hungarian corporate law followed the European tendencies when in 2006, it set lower minimum capital amounts. Lower minimum capital amounts, in harmony with The European Charter for Small Enterprises, serve the purpose of rendering the establishment of companies easier in the European Union, and eliminating bureaucratic obstacles. At the same time, it is to be noted that the creditors as stakeholders can enjoy less protection through the lower minimum capital amounts. For example, in Hungary, the establishment of a limited liability company requires only HUF 500,000 as equity capital, which amount does not at all seem to be suitable to satisfy more serious creditor claims. In our view, there is an emptying of minimum capital amounts on a global scale, which process results in higher business risks from a creditor's point of view.
In addition to the aforementioned, in relation to the protection of creditors, we also need to mention the liability of the members of the company. The members (or shareholders) who abused their limited liability to the disadvantage of creditors, shall have unlimited and joint and several liability. (In the legal practice, such liability is typically established in cases where the members dispose of the company's assets as their own, or they decrease it to another person's benefits, by drawing away the security for the satisfaction of creditor claims.)
It is also to be noted that a rather controversial provision was introduced in Hungarian corporate law in 2006, prescribing that in a situation threatening with insolvency, the executive officers are to act primarily in accordance with the interests of creditors (and not the interests of the owners). This provision creates a near-impossible situation, since the status of the executive officer is mainly based on the confidence of the company's members (owners).
The state interest, as stakeholder interest, intertwines with the operation of companies in several respects. One of the most important connection points is the state revenue generated through the tax paid by companies.
Naturally, for companies their own economical interests are more important than the state interest. Therefore, it is understandable that companies do not wish to pay more taxes than absolutely necessary, in other words, companies try to minimize taxes. This creates an interesting situation in the field of tax law-politics, since although states setting higher tax rates would theoretically receive more revenue, more companies will have their seat registered in states where there are more advantageous conditions from a tax law point of view.
This phenomenon is known as the so-called Delaware-effect. In the United States of America, the state of Delaware is of a small area with small population, but many of the largest companies are registered in Delaware.[22] The reason for the occurrence of the phenomenon is that the companies find the most advantageous tax law conditions in such state, and it is, on the one hand, advantageous for the companies, and on the other hand, also advantageous for the state, since due to the large number of registered companies, significant revenue is generated from
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the taxes of the companies.[23] As for the situation in Europe, the Netherlands has long been aspiring for the title of "the Delaware of Europe", but taking into consideration the principles of EU law, such intention could not have become fully successful.
Naturally, for the tax-optimization of large companies, it is not sufficient if the parent company is registered in an area advantageous from a tax law perspective. It is also necessary that the subsidiaries registered in various states minimize their local profit, by way of transferring, under various titles (e.g. advisory services), the larger part of the revenue to the parent company, paying taxes in a more advantageous environment. Therefore, one of the most topical legal issue of the operation of company groups is the examination from a tax law perspective, that also means the base for the guarantee of state interests.
However, appropriate legal regulation in itself is not sufficient for the enforcement of state interests, the control system and the tax authorities are also to operate effectively and hold the appropriately extensive authorizations, in order to prevent the transfer of profit under fictitious legal titles. Emphasis is to be laid on the examination of agreements concluded between members of a company group, where the price-value ratio is disproportionate (with special attention to frequently used legal titles, e.g. advisory services, etc.)
Further to tax law aspects, the role of the state is also to be emphasized, because the state is a stakeholder which, through legislative tools, can most directly influence the contents of regulations concerning companies. Therefore, it is state's task - in addition to the fact that the state itself can be considered as a stakeholder - to recognize and guarantee the interests of other stakeholders through legislation, if necessary.
Public interest is a highly complicated category, especially if we wish to interpret it extensively. Since we categorized the interest of the state as a separate stakeholder interest, the concept of public interest cannot be identified with the concept of state interest. In our opinion, public interest, from a stakeholder-protection aspect can be interpreted as a wider scope of interest than the scope of state interest, consequently, the affected persons are also more difficult to identify. From global social, environmental and economical aspects, everything that has an advantageous effect on public health, social welfare and public disposition (etc.) is to be considered of public interest, while everything is against public interest that has a negative effect on the aforementioned. The scope of the problem is relatively wide, since certain areas of companies' activities affect everybody, but the scope of responsible persons cannot be clearly determined. For example, it cannot be determined who and at what level is liable for global warming, or who is liable for the spectacular deterioration of public taste. At the same time, the scope of the affected persons who may act as stakeholders in the interest of protecting general public interest protection categories, and holding some legal guarantee, cannot be clearly determined. Therefore, from the aspects of legislators and the persons applying the law, it is always a complicated issue, where the priority of public interest protection begins, if such interest would otherwise clash with other (e.g. shareholder) interests.
At the same time, there is precedent that public interest (social interest) wins against other - even profit-oriented - interests. The lawfulness of the infringement of the shareholder primacy principle was declared in the United States in 1968, in the decision of the Shlensky vs. Wrigley case. According to the state of affairs constituting the basis for the legal dispute, the baseball team called Chicago Cubs did not install lighting in the Wrigley Field Stadium, making it impossible for the team to play at the stadium at night. The shareholders disputed the decision of the management, and brought a claim against the management. The management argued that they acted in consideration of public interest, which in this particular case meant the observation of the residential interest, and the consideration of the disadvantageous effects of night-time games, disturbing rest. At the same time the management acknowledged that in this particular case it ignored the direct financial interest of the shareholders. The court granted the management's argument, reasoning that the shareholders' interests regarding profit was ignored in order to further other interests.[24] ■
NOTES
[1] See Romano, Roberta: The Sarbanes-Oxley Act and the Making of Quack Corporate Governance in Yale Law Journal, 2004-2005/7. p. 1521-1611.
[2] See Westbrook, David A.: Corporation Law After Enron: Possibility of a Capitalist Reimigination in Georgetown Law Journal, 2003-2004/1. p. 73-80.
[3] See Powers, William C., Jr; Troubh, Raymond S.; Winokur, Herbert S., Jr.: Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp. 2002, february 1. Available: http://fl1.findlaw.com/news.findlaw.com/wp/docs/enron/specinv020102rpt1.pdf.
[4] See Rickford, Jonathan: Fundamentals, Developments and Trends in British Company Law - Some Wider Reflections - First Part: Overview and the British Approach. In: European Company and Financial Law Review 2004/1. p. 391-415.
[5] See Goergen, Marc; Manjon Antolin, Miguel C.; Renneboog, Luc: Recent Developments in German Corporate Governance(2004. május). In: ECGI - Finance Working Paper
- 75/76 -
No. 41/2004 (Revised); CentER Discussion Paper Series No. 2004-123 (Revised). Available: SSRN: http://ssrn.com/abstract=539383 or DOI: http://10.2139/ssrn.539383
[6] See Charreaux, Gérard; Wirtz, Peter: Corporate Governance in France. In: N. Kostyuk, U.C. Braendle et R. Apreda "Corporate Governance", Virtus Interpress 2007. p. 301-310.
[7] See Soltenberg, Clyde; Lacey, Kathleen A.; Crutchfield George, Barbara; Cuthbert, Michael: A Comparative Analysis of Post-Sarbanes-Oxley Corporate Governance Developments int he US and European Union: The Impact of Tensions Created by Extraterritorial Application of Section 404 in American Journal of Comparative Law, 2005/2. p. 459-465.
Also see Acevedo, Arthur: How Sarbanes- Oxley Should be Used to Expose the Secrets of Discretion, Judgement and Materiality of the Auditor's Report in De Paul Business and Commercial Law Journal, 2005-2006/1. p. 8-10.
[8] See Davies, Paul L.: Board Structure in the UK and Germany: Convergence or Continuing Divergence? Available: SSRN: http://ssrn.com/abstract=262959 or DOI: http://10.2139/ssrn.262959.
[9] See Hopt, Klaus J.: The German Two-Tier Board: Experience, Theories, Reforms. In: Hopt, Klaus J. and others: Comparative Corporate Governance: The State of the Art and Emerging Research. Oxford 1998. p. 227-228.
[10] See Henze Hartwig: Neuere Rechtsprechung zu Rechtsstellung und Aufgaben des Ausichtsrats. In: Der Betrieb. 58 (2005). p. 165.
[11] See Davies, Paul L.: Board Structure in the UK and Germany: Convergence or Continuing Divergence? Available: SSRN: http://ssrn.com/abstract=262959 or DOI: http://10.2139/ssrn.262959.
[12] See http://hvg.hu/gazdasag/20090319_uSA_AIG_jutalom_ado.aspx
[13] See Aguirre, Gary J.: The Enron Decision: Closing The Fraud- Free Zone on Errant Gatekeepers? In Delaware Journal of Corporate Law, 2003/2. p. 445-455.
[14] See Davies, Paul L.: Board Structure in the UK and Germany: Convergence or Continuing Divergence? Available: SSRN: http://ssrn.com/abstract=262959 or DOI: http://10.2139/ssrn.262959.
[15] See Kristina A. Sadlak: The European Comission's Action Plan to Modernize European Company Law: How Far Should the SEC Go in Exempting European Issuers from Complying with the Sarbanes-Oxley Act? in Brigham Young University - International Law and Management Review, 2006-2007./winter. p. 1.
Also see Lucian Bebchuk & Jesse Fried: Executive Compensation: Who Decides? - Pay Without Performance: The Unfulfilled Promise of Executive Compensation, Cambridge, MA: Harvard University Press, 2004, Reviewed by Stephen M. Bainbridge, in Texas Law Journal, 2005. Vol. 83. p. 1638.
[16] See Coffee, John C.: The Attorney az Gatekeeper: an Agenda for the Sec in Columbia Law Review, 2003/5. p. 1296-1299.
[17] See Lipton, Martin; Lorsch, Jay W.: A Modest Proposal for Improved Corporate Governance. In: Business Lawyer, 1992. Vol 48. p. 69-70.
[18] See Jungmann, Carsten: The Effectiveness of Corporate Governance in One-Tier and Two-Tier Board Systems. In: European Company and Financial Law Review. 2006. p. 453-454.
[19] See Romano, Roberta: The Sarbanes-Oxley Act and the Making of Quack Corporate Governance in Yale Law Journal, 2004-2005/7. p. 1521-1611.
[20] See Elias Mossos: Sarbanes-Oxley Goes to Europe: A Comparative Analysis of Unite States and European Union Corporate Reforms After Enron in Currents: International Trade Law Journal, 2004/1. p. 9-10.
[21] See Greenwood, Daniel J. H.: The Dividend Puzzle: Are Shares Entitled for the Residual? in The Journal of Corporation Law, 2006-2007/1. p. 103-159.
[22] See Arsht, Samuel: A History of Delaware Corporate Law. In: Delaware Journal of Corporate Law. 1976/1. p. 1-22.
[23] See Strine, Leo E.: The Delaware Way: How We Do Corporate Law and Some of the New Challenges We (and Europe) Face. In: Delaware Journal of Corporate Law. 2005/3. p. 673-696.
[24] See Fairfax, Lisa M.: The Rethoric of Corporate Law: The Impact of Stake Holder Rethoric on Corporate Norms in The Journal of Corporation Law, 2005-2006/3. p. 684.
Lábjegyzetek:
[1] The Author is an assistant lecturer.
Visszaugrás
