As a result of extensive discretionary powers being conferred on the board of directors, there must be effective mechanisms to ensure the board’s accountability, guarding the company (practically shareholders) against the risk of misuse of management powers. The necessity of accountability can be based on various rationales, of which the following are the most significant. More generally, it can be contended that the presence of accountability mechanisms is a prerequisite for promoting a good system of corporate governance.348 To be sure, the enhancement of effective corporate governance, as has been
frequently claimed, would also bring about a strong corporate performance.349 Arguably,
board accountability is, therefore, expected to deter many serious errors and to encourage careful exercises in decision-making,350 which can, in turn promote good corporate
performance.351
One of the principal arguments put forward as a basis for accountability is to connect the latter with the concept of power.352 One commentator points out that accountability can be
regarded as ‘a norm of governance’, establishing manners of wielding power and responses to power.353 In the corporate governance context, accountability has to be present in
exchange for the granting of power to the board 354 in order to ensure that the power is
347 See article 81 of the CGRs 2017, which is similar to article 16 of the CGRs 2006 in this regard. 348 Keay (n 304) 173.
349 See H Hutchinson, ‘Director Primacy and Corporate Governance: Shareholder Voting Rights Captured by
the Accountability/Authority Paradigm’ (2004) 36 Loy U Chi LJ 1111, 1132.
350 See C Hurt, ‘The Duty to Manage Risk’ (2014) 39 Journal of Corporation Law 253, 273. 351 Keay (n 304) 174.
352 A Licht, ‘Accountability and Corporate Governance’ (September 2002) 17–22
<https://papers.ssrn.com/sol3/papers.cfm?abstract_id=328401> accessed 1 April 2016.
353 Ibid 17.
354 A Keay And J Loughrey, ‘The Framework for Board Accountability in Corporate Governance’ (2015) 35
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exercised in a way that does not harm shareholders’ interests.355 It can further be said that
the presence of accountability legitimates the exercise of powers given to the board.356 If
there was no accountability, shareholders would distrust any decision made by the board357
because directors being ‘beyond challenge would make them all suspect’.358 This lack of
shareholders’ trust in the board of directors might in the end lead to shareholders’ reluctance to invest additional capital.359 Indeed, given the fact that directors’ actions and
decisions can considerably affect shareholders’ interests, it is not surprising to see shareholders dissatisfied if directors are able to exercise their wide powers without the potential of being held accountable for their actions.
Another reason for accountability can be drawn from the agency theory, as many emphasise the function of accountability in reducing agency costs (i.e., pursuing goals and objectives that impose costs on shareholders) caused by the delegation of management power to a group of individuals other than shareholders.360 In this regard, there are two
main types of directorial wrongdoings. First, is what is referred to as a ‘shirking’ which is described as the director’s failure to make the required effort in managing the company’s affairs.361 In fact, this failure does not normally result from the aversion of work but rather
from the strong wish to conduct other activities at the expense of taking time and effort to manage the company.362 The second type of self-interest conduct that imposes costs upon
shareholders is ‘stealing’, which refers to the act of ‘diverting some or all of the firm’s assets placed under his management to his personal and exclusive benefit’.363 As far as
stealing is concerned, the directors’ diversion of corporate wealth can take a number of forms in which the engagement in self-dealing transactions and the appropriation of corporate opportunities are the most important.364 According to the agency theory of the
company, one of the key objectives of the corporate governance system is to reduce conflicting interests within the agency relationship by putting in place mechanisms that
355 Ibid.
356 Moore (n 330) 41.
357 Keay and Loughrey (n 354) 263.
358 S Bottomley, The Constitutional Corporation: Rethinking Corporate Governance (Aldershot, Ashgate
2007) 73.
359 Moore (n 330) 40–41; Keay (n 304) 174–175.
360 See, for example, Bainbridge (n 323) 101 and 111–113; Keay (n 304) 175; Licht (n 352) 20.
361 See A Pacces, Rethinking Corporate Governance: The Law and Economics of Control Powers (Routledge
2012)99; M Jensen and W Meckling, ‘Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure’ (1976) 3 Journal of Financial Economics 305, 313.
362 B Cheffins, Company Law: Theory, Structure and Operation (Oxford, Clarendon Press 1997) 123. 363See Pacces (n 361) 96.
364 For different methods of diversion of corporate assets, see, for example, L Enriques, G Hertige and
H Kanda, ‘Related-Pparty Transactions’ in R. Kraakman et al. (eds), The Anatomy of Corporate Law: A
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align the interests of agents (i.e., directors) with the principal’s interests (shareholders).365
The failure to do so, as the theory assumes,366 is likely to give rise to directors’ engagement
in stealing and/or shirking,367 and to produce disincentives for directors to maximise
shareholders’ interests.368 Therefore, some commentators maintain that directors’
accountability is needed to ensure that directors do not involve themselves in advancing their self-interest (i.e., opportunism or stealing) or failing to exert the utmost effort to preserve the interests of the company and its shareholders (i.e., shirking).369 Directors’
accountability can be seen as a significant factor in ensuring the directors’ proper performance of their obligations and to enhance their loyalty to the company.370