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CLB 3rd Biennial Public Lecture



1 THE CREDIT CRISIS OF 2008……………………………………………………………………………………………….3

(a) The crisis of capital………………………………………………………………………………………………………….3

(b) The governmental response to the crisis…………………………………………………………………………………….5


(a) The part-nationalization of banks…………………………………………………………………………………………7

(b) The traditional division of corporate governance theories: shareholder v stakeholder………………………………….8

(c) Corporate market responsibility…………………………………………………………………………………………….9


4 CONCLUSION……………………………………………………………………………………………………………….20

May I take this opportunity to thank you for inviting me to Lagos to discuss issues concerning corporate governance? I arrived in Lagos on Tuesday – on the seventh anniversary of Enron’s bankruptcy. In October 2001, the Enron Corporation stunned the financial world when it announced a $1 billion loss. Three weeks after that, it reported a 20% reduction in its profits, mostly due to improper accounting. Three weeks later, the seventh largest company in the United States had filed for bankruptcy.


Seven years ago – even six months ago – one would have hoped that a company’s announcement of $1 billion in losses, or a 20% reduction in profits, would be big news. But, in the context of the credit crisis of 2008, the enormity of the Enron scandal has dimmed. In the fiscal year of 2009, Freddie Mac, the giant mortgage finance company in the US, stands to post losses of $40 billion.1 And on 29 September 2008 – in a single trading day – the Dow Jones dropped 778 points – or about 7% – and knocked out $1.2 trillion in market value. Like the meeting of the Group of 20 economies on 15 November 2008, we meet ‘amid serious challenges to the world economy and financial markets.’2 Things have fallen apart.

I am, therefore, grateful for the opportunity to discuss some of the challenges that face the modern corporation – especially the public corporation. I am particularly grateful for the opportunity to discuss these issues with the business leaders and lawyers of Nigeria, for the following reason. This public lecture of Centre for Law and Business falls in between the two meetings of the Group of 20 economies, which propose to re-shape the institutions that govern the world market economies. The international economic order is being remade. At its meeting in November 2008, the G20 made plain that the institutions of the second Bretton Woods system must be erected in consultation, not only with the developed economies which shaped the first system, but also with the major economies of the developing world. The Brazilian President, Luiz Inácio Lula da Silva

1 ‘Ahead of the Bell: FBR gauges Freddie Mac losses’, Forbes, 17 November 2008: http://www.forbes.com/feeds/ap/2008/11/17/ap5702405.html

2 Statement from G-20 Summit at paragraph 1.2

noted at the summit that ‘we are talking about the G20 because the G8 doesn’t have any more reason to exist. The emerging economies have to be taken into consideration in today’s globalised world.’3 I therefore look forward to learning some of the opinions of the financial and legal communities of one of Africa’s largest economies.

3 ‘Emerging Economic Nations Underline Status at G20 Summit’, The Telegraph, 16 November 2008.

4 ‘Finance in the Furnace’, Prospect, November 2008 at 30-31.


(a) The crisis of capital

When the G20 convened in Washington three weeks ago, their task was to redress the effects of risky lending practices on both sides of the Atlantic. The US banks had engaged in practices of sub-prime mortgage lending; that is, the provision of credit, which is secured over personal assets, to those whom the banks normally consider ineligible. The European banks, on the other hand, had – simultaneously – engaged in practices of sub-prime lending to developing economies. The Bank for International Settlements reported in November that western European banks had lent more than $1.5 trillion to eastern European countries.4 When the property prices in the US failed to continue rising, it was a matter of weeks before the effects of defaulting mortgagees, and a slowed US economy, were felt by the developing economies, and then by the banks of Iceland and Austria and others.


5 Cadbury Committee, Report of the Committee on the Financial Aspects of Corporate Governance, 1992 at paragraph 2.5.

6 New York, Harper Publishing, 1975 at 82.

While it is clear that the credit crisis – ie, the crisis caused from banks failing to make credit available – poses problems for the markets and for governments, does the crisis pose particular problems for current systems of corporate governance? The Cadbury Committee defined ‘corporate governance’ as ‘the system by which companies are directed and controlled.’5 To an extent, crises in the market are par of the course, and are no indication of a deficiency in the ways that companies are controlled. Joseph Schumpeter wrote that it is in the nature of capitalism to progress by means of ‘creative destruction.’ In Capitalism, Socialism and Democracy, he reasoned that: ‘Capitalism … is by nature a form or method of economic change and not only never is but never can be stationary.’6 The course of history tends to prove Schumpeter’s point. The stock market has been crashing ever since stocks have been publicly traded. In 1720, the English stock markets were rocked by the ‘South Sea Bubble’. In August 1720, shares in the South Sea Company were traded at £1000 pounds each, but the shares plummeted in the stock market crash to £100 before the year was out. Isaac Newton lost £20,000 in the crash. Some may have noted that he, of all people, must have realized that what goes up must come down. Perhaps it was in response to those critics that Newton replied ‘I can calculate the motions of heavenly bodies, but not the madness of people.’


7 It is noted that the US Congress passed the ‘Paulson Plan’ (ie, Emergency Economic Stabilization Act of 2008) on the understanding that the $700 billion would be used to purchase the toxic mortgage-related assets of banks and other Wall Street institutions. Nonetheless, Henry Paulson has since announced that the $700 billion will also, and perhaps mostly, be used to inject capital into banks in exchange for equity. See ‘Paulson abandons plans to buy up America’s toxic mortgage assets’, The Guardian, 13 November 2008: http://www.guardian.co.uk/business/2008/nov/13/harry-paulson-banking-rescue-mortgage.

8 Hansard, House of Commons, ‘Financial Stability’, 8 October 2008, Column 276.

9 The other two parts of the rescue package were as follows: firstly, the Bank of England made available ‘at least £200 billion’ of liquidity measures, whereby the Bank of England pledged to ‘continue to lend those funds to banks’ and secondly, the Government ‘offer[ed] a temporary underwriting for any eligible new debt issued by banks.’ Hansard, House of Commons, ‘Financial Stability’, 8 October 2008, Column 277, 278.

10 Hansard, House of Commons, ‘Financial Stability’, 8 October 2008, Column 278.

It may be that the current credit crisis is a natural part of the life cycle of any bull market. Nonetheless, it is my contention that the crisis and, in particular, the response of Governments to the crisis, pose new challenges for law and business in the area of corporate governance.

(b) The governmental response to the crisis

In what ways have governments responded to the credit crisis? Both the US Treasury and European Governments have elected to follow the blueprint of Gordon Brown’s rescue package.7 In the House of Commons, on 8 October 2008, the Chancellor, Alistair Darling, described the three ‘strands’8 of the package.9 The second of these strands was the Government’s plan to part-nationalize some of the UK banks. Mr Darling explained:10

The Government stand ready to buy preference shares in the participating banks. … The Government will receive a fixed regular payment for holding those shares and will get better protection against any future losses.


11 Statement from G20 Summit, 15 November 2008 at paragraph 5.

12 Hansard, House of Commons, ‘Banking Bill’, 13 October 2008, Column 702.

In addition to the short-term measure of recapitalization of the banks, Governments have also announced their intention to implement longer-term solutions to the credit crisis. The communiqué of the G20 meeting expressed the intent of the 20 economies to ‘address regulatory deficiencies’.11 As the shadow Chancellor told the House of Commons on 13 October 2008: ‘a regulatory system has failed when one ends up having to nationalize half the banks in the country’.12 The mandate of this new regulatory regime, and the ways that the regime may ensure the stability and growth of the markets, are yet to be identified and constructed.

In what ways do the short and long-term governmental responses to the credit crisis pose challenges to law and business? In the short-term, the crisis poses a challenge for business: how may the banks manage to make a profit while the Government owns its shares? The bank recapitalization project will dramatically change the structure by which banks are governed, at least until the Government sells its shares. The project will also reveal the extent to which the system of corporate governance is underpinned, and conditioned, by a principle of market stability.

2008 marks, not only the seventh anniversary of Enron’s bankruptcy, but also the 50th anniversary of Shell exporting oil from Nigeria. In this context, and in the longer-term, I argue that the crisis poses a challenge for the law. There are signs that the credit crisis has the potential to


13 ‘ING bank accepts €10bn Dutch cash injection’, The Guardian, 19 October 2008: http://www.guardian.co.uk/business/2008/oct/19/ing-bank-dutch-cash-injection.

14 ‘Two European Banks Offer Gloomy Outlooks’, The New York Times, 4 November 2008 http://www.nytimes.com/2008/11/05/business/05ubs.html?8br.

15 ‘Paulson abandons plans to buy up America’s toxic mortgage assets’, The Guardian, 13 November 2008: http://www.guardian.co.uk/business/2008/nov/13/harry-paulson-banking-rescue-mortgage.

prompt the emergence of a new structure of corporate governance and a fresh focus on the corporate responsibility of public companies. And this is an opportunity that the law must seize.


(a) The part-nationalization of banks

Turning firstly to the challenges of corporate governance that face many of the American and European banks. Since October 2008, European Governments have recapitalized, and become shareholders in, a number of the biggest banks. The UK Government owns a majority shareholding in the Royal Bank of Scotland (RBS) and over a 40% share in Lloyds and HBOS. The Dutch Government injected a €10 billion capital injection into the ING Group in return for preference shares.13 And the Swiss Government has a minority shareholding in UBS.14 On 13 November 2008, the US Treasury Secretary, Henry Paulson, announced that the US Treasury also intends to inject capital into US banks in return for equity.15

How are corporations governed when governments own some of the corporations’ shares? It is argued that the part-nationalization of the


16 Dodge v Ford Motor Company 204 Mich 459, 170 NW 668 (1919) at 684.

17 Principle VI(a).

18 M. Friedman, Capitalism and Freedom, Chicago, University of Chicago Press, 1963 at 133; see also M. Friedman, ‘The Social Responsibility of Business is to Increase its Profits’, The New York Times Magazine, 13 September 1970.


world’s biggest banks challenge the fundamental assumptions of the traditional doctrine of corporate governance.

(b) The traditional division of corporate governance theories: shareholder v stakeholder

Corporate governance theories, and the practices of company directors, have long been divided on the following issue: in whose best interests should a company be managed? The traditional doctrine argues that ‘a business corporation is organized and carried on primarily for the profit of its stockholders.’16 For example, the OECD Principles on Corporate Governance state that ‘board members should act … in the best interest of the company and the shareholders.’17 In Capitalism and Freedom, Milton Friedman argues that:18

there is one and only one social responsibility of business – to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.

Nonetheless, other theorists argue that, while a company owes a minimum obligation to safeguard the investment that a shareholder makes in a company, the company does not exist simply so as to make the shareholder a profit. It exists for ‘other purposes of perhaps equal dignity:


19 T.W. Allen, ‘Our Schizophrenic Conception of the Business Corporation’ (1992) 14 Cardozo Law Review 261 at 271; see also O. Amao, ‘Corporate Social Responsibility, Multinational Corporations and the Law in Nigeria: Controlling Multinationals in Host States’ (2008) Journal of African Law 89.

20 New York, Commerce Clearing House, 1932 at 311.

the satisfaction of consumer wants, the provision of meaningful employment opportunities and the making of a contribution to the public life of its communities.’19 For example, in their influential treatise, The Modern Corporation and Private Property, Berle and Means argued that shareholders, as ‘owners of passive property’:20

by surrendering control and responsibility over the active property, have surrendered the right that the corporation should be operated in their sole interests – they have released the community from the obligation to protect them to the full extent implied in the doctrine of strict property rights. … The control groups have cleared the way for the claims of a group far wider than either the owners or the control. They have placed the community in a position to demand that the modern corporation serve not alone the owners or the control but all society.

(c) Corporate market responsibility

To some extent, the Government’s part-nationalization of the public companies is an affirmation of the traditional doctrine of shareholder value. The Governments hope that the banks will be able to operate so as to make a profit for the taxpayer, as shareholders. When Mervyn King, the Governor of the Bank of England, appeared before the House of Commons Treasury Select Committee, he defended the decision to


21 ‘Government’s UKFI company to manage investments in high-street banks’, The Times, 4 November 2008:


22 See, eg, H. Hansmann and R. Kraakman, ‘What is Corporate Law?’ in R. Kraakman et al, The Anatomy of Corporate Law, Oxford, Oxford University Press, 2004 at 12.

23 See also, e.g., principle A.1 of section 1 of the UK’s Combined Code on Corporate Governance, which states that: ‘Every company should be headed by an effective board, which is collectively responsible for the success of the company.’

recapitalize the banks, and argued that the Government will ‘get money down the road which will more than justify the initial sums put up.’21

However, to a significant extent, the manner in which the Governments have recapitalized the banks challenges the assumptions of the doctrine of shareholder value, and contradicts some of the fundamental principles of corporate governance law.

A basic principle of corporate governance states that rights of ownership are separated, in a public company, from the rights to control the company’s business.22 For example, s63(3) of the Companies and Allied Matters Act 1990 (Nigeria) states that:23

Except as otherwise provided in the company’s articles, the business of the company shall be managed by the board of directors … .

The UK Government has expressed a sentiment that, in consideration for its purchase of preference shares in a company, the banks will be operated in the interests of the community, or the taxpayers, as a whole; and, more specifically, in order to further the fiscal policies of the Government. As Mervyn King explained to the Treasury Select


24 ‘Government’s UKFI company to manage investments in high-street banks’, The Times, 4 November 2008:


25 Alistair Darling, Hansard, House of Commons, ‘Financial Stability’ 8 October 2008, Column 281.

26 See, e.g., s63 (4) Companies and Allied Matters Act 1990 (Nigeria); Article 3(1) of Draft Model Articles of Association for Public Companies, June 2006, available at: http://www.berr.gov.uk/files/file29935.pdf.

27 Hansard, House of Commons, ‘Small Businesses’ 30 October 2008, Column 1013.

Committee, the bank recapitalization ‘was not done in the interests of the banks. It was done to protect the rest of the economy from the banks.’ 24

The UK Government, as shareholder, has attempted to direct the business strategy of the banks, and assume the role of company director, so as to ensure ‘that the banks have the appropriate policies in place’.25 The Government has sought to mould the business activities of the banks in at least three ways; none of which entails the passing of a resolution at a general meeting.26 Firstly, on 30 October 2008, Alistair Darling told the Commons that: 27

The measures that I announced on 8 and 13 October included agreements with the banks that use the bank reconstruction fund that they would maintain the availability and active marketing of competitively priced lending to small businesses at 2007 levels.

It does not seem relevant to the Government that, if the banks continued to lend at 2007 levels, the banks will be unable to make a profit, nor, perhaps, safeguard the capital investment of existing shareholders.

Secondly, in early November, the Government imposed pressure on the banking chiefs to lower interest rates and pass on the interest rate cut


28 ‘Lenders pledge to pass on full rate cut’, The Independent, 7 November 2008.

29 ‘Lenders pledge to pass on full rate cut’, The Independent, 7 November 2008.

30 HM Treasury, ‘New company to manage Government’s shareholding in banks’, 3 November 2008: http://www.hm-treasury.gov.uk/press_114_08.htm.

of the Bank of England. It may be that Alistair Darling was exerting pressure on the banks in his capacity as Chancellor, and not as shareholder of the banks. Yet, it is interesting to note that the first UK bank to lower rates was Lloyds TSB,28 in which the Government owns more than 40% of its shares. John McFall, the chairman of the Treasury Select Committee, did not seek to hide the motivations of the Government. He argued that the banks: 29

are being short-sighted. Given that they have had copious amounts of money from the taxpayer and are fully guaranteed, it must dawn on them that they have a social responsibility as well. The pressure on them will be maintained until they acknowledge that responsibility.

Thirdly, the Treasury has incorporated a company, the UK Financial Investments Ltd, to manage the UK Government’s investments in the banks. In a press release, upon the company’s incorporation, the Treasury announced that the company’s:30

overarching objectives will be to protect and create value for the taxpayer as shareholder, with due regard to financial stability and acting in a way that promotes competition.

Alistair Darling is not concerned that these measures undermine a settled structure of corporate governance in which ownership is separated from management. As Darling argues, the banks ‘knew the terms and


31 ‘Wiggling out of the deal’, The Guardian, 4 November 2008.

conditions and they signed up to them.’31 While the Government may have reached agreement with the banks it remains unclear, and apparently irrelevant, whether the terms of any shareholder agreement are consistent with the banks’ articles of association, nor the provisions of the Companies Act 2006.

In these respects, the Government’s part-nationalization of the banks has revealed a latent contingency to the traditional doctrine of shareholder value. When a company assumes a role in the operation of the markets, such that the failure of the company to perform that function disrupts the equilibrium of the market, the company will not be free to relinquish that function. The company will not be free to act only in the interests of the shareholders, if the action or inaction is not in the interests of the market as a whole. Thus, the Government’s recapitalization of banks resolves, at least in the short-term, the controversial question, ‘in whose interests must a company be operated?’ While a company is expected to aim to make a profit for its shareholders, that profit cannot be derived at the expense of market stability. The Government’s plan thereby affirms a corporate governance theory of corporate market responsibility.

In the short-term, the UK banks, and other part-nationalized companies, have a challenge ahead of them, as their directors negotiate with the most active of shareholders: a Government with a mandate to stabilize the markets.


32 Statement from G-20 Summit at paragraph 2.


Secondly, and in the long-term, the credit crisis presents a challenge to the law: to develop a new regulatory structure that enforces principles of corporate social responsibility on all companies. There are indications that the governmental responses to the credit crisis, in both developed and developing countries, may, in the long-term, enable the implementation of an effective regime of corporate social responsibility. The G20 meeting, as well as the leaders of the US, has indicated that Governments must implement a new regulatory regime. Undoubtedly, this new regulatory regime must protect the markets against the risks to instability that have already materialized. The statement from the G20 summit stated that ‘we must lay the foundation for reform to help to ensure that a global crisis, such as this one, does not happen again.’32 However, the main challenge that the credit crisis affords legal leaders is the challenge to ensure that the new regulatory regime also protects markets against the risks that have yet to wreak havoc on the stock exchange, but have every potential to do so.

The collapse of Enron in 2001, and the crisis that has hit the world’s credit markets in the last few economic quarters, reminds the law of the degree of litheness that it needs to respond to the challenges that face company law. When a crisis hits company law, the crisis hits hard and fast. The law does not find its principles becoming slowly more irrelevant to


33 ‘No place at the summit but new US leader backs aid package’, The Times, 17 November 2008: http://business.timesonline.co.uk/tol/business/economics/article5168528.ece.

the coalface, or air-conditioned-face, of corporate law practice. But the markets, or the markets’ big players, simply announce the result of the law’s failure to evolve.

It is my belief that the next crisis to undermine systems of corporate governance will not pertain to the stability of a company’s credit capital, but to the stability of a company’s human and environmental capital. It is not the case that political conditions will indefinitely assure the provision of cheap human capital, whose rights to a safe place of work may be ignored. Nor is it the case that nature will indefinitely assure the provision of exploitable environmental resources.

President-elect Obama has already hinted that any regulatory regime that he introduces when he assumes the presidency must aim to address, not only issues of corporate market responsibility, but also issues of corporate social and environmental responsibility. Obama told the US 60 minutes programme that he may be prepared to bail-out, not only US banks, but also its three large automotive companies, Chrysler, Ford and General Motors. He is reported to have added, however: 33

that such financial help would have to be predicated on the car industry reforming itself and changing the type of vehicles it makes, so that ‘we are creating a bridge loan to somewhere as opposed to a bridge loan to nowhere’.


34 E.g., Gbemre v Shell Petroleum Development Corp of Nigeria Ltd and ors (suit no FHC/B/CS/53/05, Federal High Court, Benin Judicial Division, 14 November 2005).

35 [1990] 1 Ch 433 (CA).

36 Adams v Cape Industries Plc [1990] 1 Ch 433 (CA) 544.

37 Salomon v Salomon & Co [1897] AC 22 (HL) 56.

The ‘somewhere’, to which Obama hopes a new regulatory regime to take us, is, I hope, a corporate governance regime of social and environmental responsibility.

What reforms should the company laws of the world enact in order to implement this regime? Why is it that the current set of company laws, when combined with a nation’s laws in tort or crime, are insufficient to ensure a company complies with its responsibility to others in society and to the environment? For example, the tort of negligence should be sufficient to provide workers, who have been injured in a company’s asbestos mine, with a means of redress as against the company who employed the worker in the mine. Alternatively, an established constitutional framework, if applicable to corporate actors, might also be sufficient to enable plaintiffs to hold companies accountable for breaches of human rights standards.34

Current company laws cannot enforce as against a company its obligations to its stakeholders because company laws fail to conceive of the company as a profit-making entity. For example, in Adams v Cape Industries Plc,35 the Court of Appeal reasoned that the formation of a company for the purpose of shifting an incorporator’s future liabilities ‘onto another member of the group’36 is not ‘an unlawful purpose’,37


38 Adams v Cape Industries Plc [1990] 1 Ch 433 (CA) 544.

39 Adams v Cape Industries Plc [1990] 1 Ch 433 (CA) 544.

40 Adams v Cape Industries Plc [1990] 1 Ch 433 (CA) 544. See also, e.g., Harrods Ltd v Dow Jones & Co Inc [2003] EWHC 1162, [2003] All ER (D) 327 (May) (QB) [25]; Zubik v Zubik 384 F 2d 267 (3rd Cir 1967), cert denied 390 US 988 (1968) 273.

which justifies a piercing of the corporate veil. A company may be formed, and may exist, not to operate its own business and aim to make itself a profit, but simply to be the legal person in whom the liabilities of the other companies in a corporate group are deposited. In the Adams case, the Court of Appeal accepted that the subsidiary was never operated, and was never intended to be operated, in order to benefit the subsidiary itself. The Court accepted:38

that the purpose of the operation was in substance that [the parent company] would have the practical benefit of the group’s asbestos trade in the United States of America without the risks of tortuous liability.

‘This may be so’, the Court reasoned: 39

However, in our judgment, [the parent company] was in law entitled to organise the group’s affairs in that manner and … to expect that the court would apply the principle of Salomon v. A. Salomon & Co. Ltd. [1897] A.C. 22 in the ordinary way.

This reasoning is clearly rooted in the assumption that a company exists to act in the best interests of its shareholders. The Court held that ‘[w]hether or not this is desirable; the right to use a corporate structure in this manner is inherent in our corporate law.’40


However, it is respectfully argued that the use of a corporate structure in this manner – namely, to use the company as an instrument and not an end in itself – is an anathema to the basic principles of company law. It may be that economists have reason to treat the company as a mere instrument of its shareholders for the purpose of economic analysis. However, the law makes a fundamental error when it does so. It is of the essence of the law’s conception of the company that the law considers the company to be a legal person. That is, the law treats the company as a thing of ultimate value; an end in itself.

A company does not exist to further the interests of its shareholders, employees, creditors, suppliers or consumers. Rather, a company exists so that it may further its own interests; that is, to make itself a profit. For the law to ask ‘for whom does a company operate to make a profit?’ is akin to asking ‘for whom does an employee toil to earn a wage?’ For her children, to secure her own retirement or to finance a gambling habit? The question does not need to be answered in order to understand ‘who is an employee?’ So long as the law conceives of the company as a legal person, the law must treat the company as a thing of ultimate value. The courts must pierce the corporate veil, and dissolve the separate legal personality of two companies, whenever one company exists, not to make itself a profit (and thereby to be in a position to serve the interests of others), but only to serve the interests of the other company.


41 Rule 6.1.4R of the Financial Services Authority’s Listing Rules.

The requirement that a company be operated to make for itself a profit is not entirely foreign to modern company law. For example, the UK Listing Rules state that, for a company to have its shares or securities listed on a regulated market, the company must ‘be carrying on an independent business as its main activity.’41 It is argued that, for a company to maintain its separate legal personality, and not to have its liabilities attributed to another legal person, its ‘main activity’ must also be the ‘carrying on [of] an independent business’, and not, for example, the avoidance of another person’s liabilities. Another example is the unique provision of s54 of the Companies and Allied Matters Act 1990 (Nigeria), which states that, if a company intends to carry on business in Nigeria, then it must ‘take all steps necessary to obtain incorporation as a separate entity in Nigeria for that purpose.’ The reverse proposition should also be enacted; namely, that if a company wishes to obtain incorporation as a separate entity in Nigeria, then the company should aim to carry out its own business.

If company law corrects the conceptual misstep of treating the company as an instrument of other legal persons (whether those persons be shareholders, employees, or even the market or society as a whole), then the law will create a new era of corporate accountability. Under this new regime of corporate accountability, the company – and every company – is simply held to account for the ways that it breached the law of tort, contract, crime or any other regulatory regime. A company will no


42 ‘My Home under Imperial Fire’ in Home and Exile, Oxford, Oxford University Press, 2001 at 14-15.

longer be able to avoid its liabilities by incorporating a subsidiary that may be used as an entity that holds the parent’s liability. The law’s rules may thereby become an effective standard against which the behaviour of a company is judged. As a company cannot exist simply so as to hoard the liabilities of other members of a corporate group, every other member of the corporate group, and every centre of profit-making enterprise within the group, will have the liabilities attributed to it that the law imposes on all persons. In the long-term, then, the credit crisis presents company law with an exciting moment for change and, hopefully, the impetus to enact the change.


As the world stands braced to examine the short-comings of its system of corporate regulation, I am reminded of the Igbo tale of the negligent chicken, which I read in Chinua Achebe’s memoirs, Home and Exile:42

One morning all the animals were going to a meeting to which the town crier had summoned them the night before. Surprisingly, the chicken was headed not to the public square like the rest, but away from it. When his neighbours and friends asked him if by any chance he had not heard the summons to the meeting, he said he had indeed heard but, unfortunately, must attend to a very personal matter. … The emergency before the animals, as it happened, was the rampant harassment that man had begun to cause them since he learned to offer blood sacrifice to his gods. After a long and heated debate the animals … passed unanimously, a resolution to offer the chicken to man as his primary sacrificial animal.


In the context of corporate governance, this parable holds much meaning. In the short-term, for shareholders in the banks that Governments have recapitalized, the parable is a reminder that the Government as shareholder will not vote at the general meeting in the interests of fellow shareholders. Instead, in a time of fiscal crisis, the Government views the company, not as a tool by which shareholders derive profit, but as a mechanism through which public policy may be furthered, and the interests of the market as a whole promoted.

For the manager of the corporate group who wishes to structure some of the companies in that group as sacrificial chickens, the parable is a remonstration. The town crier summoned each of the animals; and each of the animals had a right to vote. If the law accords legal personality to each and every company, then the law cannot permit one person to be used as an instrument to the ends of another person. The animals would do better to eradicate the practice of animal sacrifice and to ensure that the ultimate value of each animal is respected. Similarly, company law would do better to require that each company be operated to make itself a profit, and to pierce the corporate veil whenever a company is used merely as an instrument by which other companies may limit their liability.

More generally, though, the parable serves to remind us of the privileges that we’d be negligent to refuse. For me, this was the privilege


of attending this meeting, and visiting the Centre for Law and Business. Thank you for the invitation.