REVISITING THE THEORETICAL FOUNDATIONS OF CORPORATE GOVERNANCE AND THEIR APPLICATION TO THE ONE PERSON CORPORATION ESTABLISHED IN SELECTED ASIAN COUNTRIES

Jin Young-ki: Even if Do Jun is now the largest shareholder, nothing changes. As long as I have the management rights, he can’t even move the board of directors as he likes.

Jin Seong-jun: The world has changed, Father. The world where corporate existed to earn money for the owner is over. It’s a world where darn stakeholders’ rights and profit are more important.

Introduction

The dialogue quoted above was between the descendants of the Chairman of a premier Korean corporation in a drama series, “Reborn Rich” (2022), highlighting the evolving corporate world. In reality, there is a similar observation -- corporations do not exist purely for money, but have to consider their roles and obligations to the various stakeholders. The issue of corporate governance therefore became more complex as it extended its concerns. Gone are the days where corporations embrace only the interests of the shareholders and focus their goal to earn money. Nowadays, the stakeholders, such as the employees, customers, suppliers, shareholders, prospective investors, creditors, governments, banks and society etc., inevitably form part of the picture. Thus, the quality of corporate governance is one of the highly important factors to survive in an evolving corporate world, particularly, the balanced interests of the shareholders and stakeholders.

Corporate Governance 

“The 1997 Asian Financial Crisis was a wake-up call for Asian policy makers and companies. The crisis exposed many institutional and policy weaknesses in the region and spurred multiple reforms. To support this drive to improve corporate governance rules and practices, the Asian economies, along with the OECD, established the Asian Roundtable on Corporate Governance in 1999.

“Since then, corporate governance has come a long way in the region. A wide range of laws and regulations have been enacted, standards developed and enforcement strengthened. A corporate governance infrastructure has been built, something that did not exist before the crisis. This infrastructure includes corporate governance committees, institutes of directors and many other institutions.

“Important changes have also recently taken place in the organisation and corporate governance of SOEs in some Asian countries. These changes have been concentrated mainly in the areas of the ownership function and the legal and regulatory framework for SOEs.

“Awareness of the OECD Principles of Corporate Governance is now high in the Asian region. In fact, all Asian economies are using the OECD Principles of Corporate Governance and outputs of the Asian Roundtable as references in the development of their regulations, corporate governance codes, listing rules, scorecards, as well as academic work. Notably, the ASEAN Corporate Governance Scorecard uses the OECD Principles of Corporate Governance as one of the main benchmarks to assess listed companies in Indonesia, Malaysia, Singapore, the Philippines, Thailand and Viet Nam.

“Importantly, the commitment by Asian jurisdictions to improve corporate governance across the region is even greater. With the integration of ASEAN capital markets and the linking of its stock exchanges by 2015, raising the visibility of good corporate governance practices is a high priority.” (Corporate Governance in Asia: Asian Roundtable on Corporate Governance, 2014)

The issue of corporate governance gained prominence with the publication of Jensen and Meekling’s article (1976) which triggered a body of theoretical and empirical work on the subject. During the 1970s and 1980s, theoretical and applied research work on corporate governance was focused primarily on US Corporations. By the early 1990s similar work had been done in other developed countries such as Japan, Germany, and the United Kingdom. This was quickly followed by research on corporate governance in emerging markets. (Lalita S. Som, Corporate Governance Codes in India, Economic and Political Weekly, 2006)

Corporate governance is a concept that would tell the future of a certain corporation. It is the heart and soul of a corporation. Everything depends on the quality of corporate governance. For this, we cannot deny the fact that the controversies involving corporations always involve the kind of governance a corporation has for after all, they are the ‘think tank” of corporations. Traditional definitions of corporate governance are narrow, focusing on legal relations between managers and shareholders. More recent definitions extend the boundaries of governance to consider the role that various stakeholders play in shaping the behaviour of firms. (Mason, Michael and Joan O’Mahony, Post-Traditional Corporate Governance, The Journal of Corporate Citizenship, 2008)

The most famous definition of corporate governance was provided in 1992 by Sir Adrian Cadbury in the Report on Financial Aspects of Corporate Governance in the United Kingdom: “Corporate governance is the system by which companies are directed and controlled.” (Global Corporate Governance Forum, c2005) To the writer, this is the simplest definition of corporate governance.

A more modern, and perhaps, a more comprehensive description of corporate governance is quoted hereunder:

“Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individual, corporations and society.”

Corporate governance has increasingly gained in importance as a result of the Asian crisis in 1987 (the inadequate supervision of brokers and trade led to Black Monday and a stock market crash); the Russian crisis in 1998; and corporate scandals and bankruptcies during 2001 (Enron) and 2002 (WorldCom). These provoked the adoption of the Sarbanes-Oxley Act on corporate governance in the United States in 2002, as well as recommendations for corporate governance codes in many countries both then and after the outbreak of the global financial crisis in 2008 (Lehman Brothers). (Rasovic, Aleksandar. Some Reflections on the Theoretical Concepts Involved in Corporate Governance — The Moral and Philosophical Aspects, 2013)

Corporate governance has a long presence in developed countries as a concept and practice, but the completion and rehabilitation of mechanisms of corporate governance have taken place in the last few years. Today, corporations are the most complex organizational form of companies. (Rasovic, 2013)

Theoretical Perspective of Corporate Governance

Stakeholder Theory

“The word ‘stakeholder’, the way we now use it, first appeared in an internal memorandum at the Stanford Research Institute (now SRI International, Inc.), in 1963. The term was meant to challenge the notion that stockholders are the only group to whom management needs to be responsive. By the late 1970’s and early 1980’s scholars and practitioners were working to develop management theories to help explain management problems that involved high levels of uncertainty and change. Much of the management vocabulary that had previously developed under the influence of Weberian bureaucratic theory assumed that organizations were in relatively stable environments. In addition, little attention, since Barnard (1938), had been paid to the ethical aspects of business or management, and management education was embedded in a search for theories that allowed more certainty, prediction and behavioral control. It was in this environment that Freeman (1984) suggested that managers apply a vocabulary based on the “stakeholder” concept. Throughout the 1980’s and 1990’s Freeman and other scholars shaped this vocabulary to address these three interconnected problems relating to business:

(1) The Problem of Value Creation and Trade: In a rapidly changing and global business context, how is value created and traded?

(2) The Problem of the Ethics of Capitalism: What are the connections between capitalism and ethics?

(3) The Problem of Managerial Mindset: How should managers think about management to:

a) Better create value and,

b) Explicitly connect business and ethics?

“Stakeholder theory suggests that if we adopt as a unit of analysis the relationships between a business and the groups and individuals who can affect or are affected by it then we have a better chance to deal effectively with these three problems. First, from a stakeholder perspective, business can be understood as a set of relationships among groups that have a stake in the activities that make up the business (Freeman, 1984; Jones, 1995; Walsh, 2005). It is about how customers, suppliers, employees, financiers (stockholders, bondholders, banks, etc.), communities and managers interact to jointly create and trade value. To understand a business is to know how these relationships work and change over time. It is the executive’s job to manage and shape these relationships to create as much value as possible for stakeholders and to manage the distribution of that value (Freeman, 1984). Where stakeholder interests conflict, the executive must find a way to re-think problems so that the needs of a broad group of stakeholders are addressed, and to the extent this is done even more value may be created for each (Harrison, Bosse, & Phillips, 2010). If tradeoffs have to be made, as sometimes happens, then executives must figure out how to make the tradeoffs, and then work on improving the tradeoffs for all sides (Freeman, Harrison, & Wicks, 2008).

There has been a great deal of discussion about what kind of entity, “stakeholder theory” really is. Some have argued that it isn’t a “theory” because theories are connected sets of testable propositions. Others have suggested that there is just too much ambiguity in the definition of the central term to ever admit of the status of theory. Still others have suggested that it is an alternative “theory of the firm” contrary to the shareholder theory of the firm. As philosophical pragmatists, we don’t have much to say about these debates. We see “stakeholder theory” as a “framework”, a set of ideas from which a number of theories can be derived. And, we often use “stakeholder theory” to refer to the rather substantial body of scholarship which depends on the centrality of the stakeholder idea or framework. For some purposes it is surely advantageous to use the term in very specific ways (e.g. to facilitate certain kinds of theory development and empirical testing), but for others it is not. Think of stakeholder theory as a genre of management theory. That is, rather than being a specific theory used for one purpose (e.g. ala resource dependence theory in management), seeing stakeholder theory as a “genre” is to recognize the value of the variety of uses one can make of this set of ideas. There is enough commonality across these uses to see them as part of the same genre, but enough diversity to allow them to function in an array of settings and serve different purposes. The stakeholder perspective has been widely applied in a wide variety of disciplines, including law, health care, public administration, environmental policy, and ethics (Freeman, et al., 2010). Before we turn to these applications we pause to lay out some important limitations and boundary conditions for stakeholder theory. (Bidhan L. Parmar, et. al., Stakeholder Theory: The State of the Art, The Academy of Management Annals, 2010)

On the other hand, according to Zuzana Dohnalová & Bedrich Zimola, the Stakeholder Concept of an Enterprise began to be fully developed in the second half of the last century. The first to deal with the issue of stakeholders in the context of the organization's existence was the Stanford Research Institute in 1963. In addition, Freeman developed a significant Stakeholder Approach to Business in his work: "Strategic Management: A Stakeholder Approach" in 1984 (Friedman & Miles, 2006; Freeman & Harison, 2007). In it, he formulated the now well-recognized as classic definition of Business Stakeholders, in the sense that these are "a group or individual who can affect, or be affected by, the fulfillment of the objectives of the organization." (Friedman & Miles, 2006). Freeman is considered to be the founder of a concept that acknowledges the existence of stakeholders in relation to business practice. (Zuzana Dohnalová & Bedrich Zimola, Corporate Stakeholder Management, 2014)

Considering that the agency and stewardship theories focus on the shareholders only, the stakeholder theory expanded the view with regard to the interested parties. It includes the employees, customers, suppliers, shareholders, prospective investors, creditors, governments, banks and society etc.

Talat Afza and Mian Sajid Nazir in citing Abrams (1951), stakeholder theory stipulates that a corporate firm or entity works to improve a balance between the interests of its diverse stakeholders in such a way that each stakeholder receives some degree of satisfaction. Further, citing McDonald and Puxty (1979), it was emphasized that companies have no longer sole responsibility towards their shareholders only, but also to the society in which they resides and operates in. Thus, the stakeholder theory explains fully well the role of corporate governance by clearing various constituents of a firm than agency theory or stewardship theory. (Talat Afza & Mian Sajid Nazir, Theoretical Perspective of Corporate Governance: A Review)

“Stakeholder theory proposed that organizations are separate entities and they are connected with many parties while achieving their targets (T. Donaldson & Preston, 1995). Moreover, they explained that it is management’s duty to make sensible decisions and put their best efforts in attaining the benefits that satisfy all stakeholders. In addition, Wang and Dewhirst (1992) that highlighted board of directors should not ignore their responsibilities towards protecting the interests of stakeholders. Similarly, Hillman, Keim, and Luce (2001) emphasized that an efficient audit committee improves corporate governance practices which ultimately performs for the benefits of all business stakeholders in a well manner. DeZoortet al. (2002) underlined stakeholder’s importance and argued that ensuring and protecting the stakeholder’s interest is the fundamental objective of a competent audit committee. Dey’s (2008) elaborated that corporate governance mechanisms comprising of audit committee are positively related to the firm’s performance and stakeholder’s welfare.

“Stakeholder theory became more popular as many researchers came to know the impact of corporate activities on the external environment so it was suggested that they should be held accountable to all the stakeholders rather than answerable to its shareholders only. Due to importance, this theory is ratified in law within thirty eight states of US which clearly revealed the impact of stakeholder theory on U.S corporations (H. J. Smith, 2003).... Donaldson and Preston (1995) gave a model about stakeholder theory in which they considered that all parties have right to get benefit from the firm.” (Afza & Nazir, Theoretical Perspective of Corporate Governance: A Review)

Agency Theory

It is highly recognized that agency theory is the starting point whenever any debate is enduring on the topic of corporate governance and its mechanisms. Berle and Means (1932) highlighted the concept of separation of ownership from the management of the firms in the form of agency problem that is primarily rooted from the partition of control between managers and shareholders. In modern firms, generally owners do not take active part in the operations of organizations and as a result they hire managers for managing the firm’s resources on their behalf. This issue creates problems when managers neglect the concerns of their principals (shareholders) and put their self-interests on priority line and collect private benefits by building empires, enjoying perquisites, get pecuniary benefits by manipulating accounting records. This divergence in agents’ actions and principals’ interests create agency problem. So at this point question arises how manager’s tasks can be aligned with the shareholders’ interests? One answer to this question is that give right and sufficient incentives to the managers that must be linked with their performance of doing best in the favor of their principals. These comprise monitoring expenditures by the owners such as auditing, budgeting, control mechanism, incentives and compensation systems, bonding expenditures by the agent and residual loss due to interest difference between owner and agent. If a firm is successful in mitigating the agency problem, the firm value increases.

Agency relationship is an agreement between two parties, in which owners (principals) assign various tasks or responsibilities to the managers (agents) for execution on their behalf. More precisely it can be defined as shareholders delegating some responsibilities to a team of experts while keeping in mind that they will perform best for the success of their organizations. There are, generally, problems that occur in the relationship of principal and agent, namely:

1. Conflict arises due to differences of both parties’ interests.

2. Difference of attitude of risk taking between shareholders and managers

3. Conflict between management and owners take place due to the asymmetry of information as well. 

  On the whole, agency theory laid emphasis on the opportunistic behavior of managers; managers try to put their interest first by forgoing shareholders’ interests. As a result, cost of resolving this problem increases due to the involvement of several corporate governance mechanisms and monitoring systems like auditing, budgeting and hiring outside directors on the board and giving monetary and non-monetary benefits to managers etc. 

This agency theory, it is submitted, cannot be applied to an OPC. The separate and distinct personality of the owner and the corporation is true when it comes to liabilities to third persons. However, when it comes to management and policy-making, the sole owner cannot be said to be the agent of himself.

Stewardship Theory

Opposite to agency theory is the so-called stewardship theory. This theory of corporate governance articulates that managers are hired for handling the firm’s operations in a good  manner and a manager’s achievement and success is measured by satisfaction he gets from the performance of the firm; therefore the manager’s primary objective is to maximize the firm value. Better firm performance is a motivational spot for corporate managers who are stewards of the firm and consider the organizational objective as their own. 

The basic idea of stewardship explains autonomy, self-governance and hard work as important elements to motivate the managers to achieve the corporate goals. In short, stewardship theory supports the management empowerment in organization. This theory is also in line with the hierarchy of human needs which highlights actions of achievement, social realization and self- actualization. However, this hierarchy is not compulsory as managers have no survival needs so compensation must be given to managers to be persuaded toward better performance as good stewards along with power and authority as only financial rewards are not sufficient. The main issue in stewardship theory is ignorance of the intrinsic nature of man. Many studies showed that the moral hazard problem is the main cause explaining why managers do not work with good faith and honesty in order to increase the wealth of owners.

The most distinctive feature of stewardship theory is to impart more trust in managers which is lacking in the perspective of agency theory. The implications of this theory are as follows:

1. The executive (insider) directors have more knowledge about their companies and are more likely to enhance the performance of their organizations instead of non-executive (outsider) directors. Outside directors only enhance the decision making of the board; 

2. Same individual resides at the board chairman and as chief executive is in favor of the company’s performance. Theory insisted that CEO duality leads towards quicker decision making and reduces unnecessary bureaucracy; 

3. Executive directors have excessive information regarding all the aspects of a company and they put more attention toward achieving the organizational goals rather than their own objectives.

In comparison with agency theory, stewardship theory argued that managers and inside directors are best to serve and act in favor of shareholders in any circumstances. Inside directors have excessive knowledge of company matters due to greater access to secret information as compared to independent directors. ((Afza & Nazir, Theoretical Perspective of Corporate Governance: A Review)

The stewardship theory in its strictest sense cannot be applied to an OPC. However, the essence of autonomy, self-governance and hard work may be applied to the single owner.

Resource Dependence Theory

A fundamental assumption of Resource Dependence Theory (RDT) is that dependence on “critical” and important resources influences the actions of organizations and that the organizational decisions and actions can be explained depending on the particular dependency situation. (Nienhuser, Werner, “Resource Dependence Theory — How Well Does it Explain Behavior of Organizations?”, 2008)

The theories of agency, stewardship and stakeholder provide the insights to the shareholders, managers and stakeholder perspectives while another theory of corporate governance which emphasizes toward the need of different resources for the success of business is named as resource dependence theory. Both stakeholder and agency theory discussed about the managers and groups of different peoples respectively but this theory introduces accessibility to resources that is a critical dimension of corporate governance debate. The seeds for resource dependence theory were carried form the work of Jeff Pfeffer who demonstrated the importance of relationship between power and exchange with in and around organization (Pfeffer, 1972). This was further emphasized by Aldrich and Pfeffer (1976) and Salancik and Pfeffer (1978). According to Pfeffer (1972), resource dependence theory argues that a company’s success is dependent upon maximizing its power over certain resources which are necessary for running smooth operations. Basically, the resource depending theory concentrates on role of board that help to secure and acquire the crucial resources of the organization by their external linkage to the environment. Through these linkages, it brings in different resources, such as information, skills, access to key constituents like supplies of raw material, buyer of outputs, public policy makers, social groups as well as legitimacy (Hillman & Dalziel, 2003). So, under this theory, board of directors is the key source of various resources that different resources provision enhances organization operation, firm’s performance and organizational life (Daily, et al., 2003). (Afza & Nazir, “Theoretical Perspective of Corporate Governance: A Review”)

Similar description was given by Ulrich and Barney (1984) who said that organizational performance is highly reliant on the power of a company to avail the required and scarce resources. They gave further explanation of the resources that are required by the company after making relationships with different parties who have access of those required bulk resources. Corporate performance can be judged by the efficiency and efficacy of the network and communication between contractual parties of firms. Several prior studies provide evidence that corporate boards played an important role in accessing the desired resources. Likewise, Salancik and Pfeffer (1978) and Dalton, Daily, Johnson, and Ellstrand (1999) found that without the help of corporate boards it is difficult for organizations to acquire necessary resources. In this theory, diversity of board members is seen as the essential element which leads towards the broader business connections (Siciliano, 1996) and finally firms perform financially well (Waddock & Graves, 1997). (Afza & Nazir)

Johnson, Daily, and Ellstrand (1996) highlighted the main feature of resource dependence theory. They said that independent directors on the boards provide more assistance in gaining the desirable resources. As an outside director who is related to a law firm will provide the legal services and advise in the board meetings with executive directors which is very costly for the firm to obtain otherwise. Directors have more linkages with the outdoor environment that is necessary for organization’s survival and future growth (Hillman, et al., 2001). They further explained that board of directors bring resources for the firms, namely necessary information, expertise, provide access to business stakeholders in which key suppliers, customers, policy makers, legal advisors and social groups are on the top. Therefore, the board of directors can be classified into following categories. Firstly, inside directors that provides information regarding company finance and regulation, make strategies and give direction for decision making. Secondly, business expert’s directors which are the present, former and top analysts of the profit-oriented larger firms, they provide guidelines for strategy making, problem solving and their professional opinion for decision making. Thirdly, specialists that provide support regarding their specific fields in which bankers, lawyers, experts of public relations and representatives of insurance companies etc. are included. Finally, type of directors is community influential that consisted upon faculty members of different universities, political or social leaders and organizational communities. (Afza & Nazir, at 260-261)

Hillman and Dalziel (2003) found board of directors as the main source for the achievement of different resources require by the firms. Generally, resource dependence theory argues the availability of efficient skills of boards that are involved in the accessibility of resources. On one hand, agency theory suggests the important of boards in monitoring the managerial activities, on the other; resource dependence theory highlighted another role of board directors as the resource providers. In addition, Ruigork, Peck, and Tacheva (2007) considered the boards as the boundary guards that shelter the necessary firm’s resources like capital, knowledge, skills and projects partnership agreements. Furthermore, Aguilera, Filatotchev, Gospel, and Jackson (2008) argued that the stewardship and stakeholder theories cover the restraining assumptions of the agency perspective, but still these theories do not provide the broader view of the corporate governance that make it connected with the diverse organizational environments. Hence, this space has been covered by resource dependence theory. (Id., at 261)

Transaction Cost Theory

A variant of agency theory, transaction cost theory according to Williamson (1999) is an  interdisciplinary coalition of economics, law and organizations which views the firm as organization comprising of people with different motives and objectives. In hiring an individual to represent and act on behalf of the owner in order to perform business operations, costs may arise. According to this theory, the frameworks of corporate governance are based on the   net effect of business transactions (internal and external) rather than the traditional view of contractual relationships outside the firm with shareholders.

Williamson (1999) described that firms may have to choose between two options of having control over the assets; either own the assets which is also known as hierarchy solution or buy the use of assets through outsourcing which is named as market solution. The selection of the decision is based upon the comparison of transaction costs of both of the options and these transaction costs can be further impacted by two important factors. One is bounded rationality which supposes that managers have limited capacity to comprehend the business problems and its solutions, which bounds the factors considered in decision making. Another one is managerial opportunistic behavior which assumes that managers are opportunists and they make the transactions decisions according to their own motives and self-interests. The same concept of bounded rationality and managerial opportunistic behavior may be used to view the motives behind making any choice by the directors and managers. Unlike the agency theory, the transaction cost theory does not discuss the shareholders’ right protection, rather it emphasizes on the effective and efficient completion of transactions by managers. So, transaction cost theory calls for corporate governance mechanisms for the effective monitoring of business activities and motives behind those activities which may reduce the opportunistic behavior of insiders. (Afza & Nazir)

The Genesis of A One Person Corporation In Selected Asian Countries

Desiring to combine the limited liability afforded by a corporation with the complete control of a sole proprietor, the one person corporation evolved. This serves as a “training ground” and an opportunity for any individual to enjoy the benefits of a corporation and at the same time, exercise sole power to manage the corporation. Thus, the corporate owner is able to execute plans that are best for the success of the corporation.

The one person corporation (OPC) is said to be a strange phenomenon both to the lay mind and to modern corporate law. The spectacular growth of the public corporation has shaped the statutory law of the last century to meet problems created by huge enterprises. As a result the recognition of the one person corporation and the determination of its legal incidents has been an entirely judicial task. The existence of such a juridical concept can be turned to practical business advantage to the extent that it allows an individual the choice of having his legal relations flow from the rules the courts invoke in the name of that concept. (Jules Silk, “One Man Corporations: Scope and Limitations”, University of Pennsylvania Law Review, Vol. 100, No. 6, 1952)

However, the concept of a one person corporation is not alien to the world. Through the years, this concept has been legally recognized in the UK (2006), USA (a.k.a Limited Liability Company in US), China (2005), Singapore (2004), Turkey (2012), UAE, Pakistan (2003). (Prem Rajani, Rashi Rajani & Miti Kapadia, “The One Man Show: Understanding the Concept of One Person Company”)

OPC In The Philippines:

In the Philippines, the One Person Corporation (OPC) had been introduced in the Revised Corporation Code of the Philippines (Republic Act No. 11232). This aims to facilitate ease of doing business in the Philippines at par with other countries.  

The Revised Corporation Code (RCC for brevity) expunged the minimum number of incorporators required to organize a corporation and allowed the formation of one-person corporation, a corporation with a single stockholder and without a minimum authorized capital stock required. Thus, Under Sec. 116 of the RCC, an OPC is a corporation with a single stockholder.  The same provision requires that only a natural person of legal age, trust or an estate may form an OPC. As an incorporator, the “trust” as used by the law does not refer to a trust entity, but as a subject being managed by a trustee. If the single stockholder is a trustee, administrator, executor, guardian, conservator, custodian, or other person exercising fiduciary duties, proof of authority to act on behalf of the trust or estate must be submitted at the time of incorporation.

The following, however, are not allowed to incorporate as an OPC:

1. Banks and quasi-banks,

2. Pre-need, trust, insurance companies

3. Public and publicly-listed companies

4. Non-chartered GOCC

5. A natural person who is licensed to exercise a profession may not organize as an OPC for the purpose of exercising such profession, except as otherwise provided under special laws.

Moreover, a foreign natural person may establish an OPC, subject to the applicable capital requirement and constitutional and statutory restrictions on foreign equity in certain investment areas or activities.

Pursuant to Sec. 121, RCC. the single stockholder shall be the sole director and president of the OPC. He can be the Corporate Treasurer, after posting a surety bond, but not as the Corporate Secretary. (RCC, sec. 122)

The OPC is not required to have a minimum authorized capital stock, except as otherwise provided by special law. (RCC, sec. 117) Further, unless otherwise required by applicable laws or regulations, no portion of the authorized capital is required to be paid-up at the time of incorporation.

The term of existence of the OPC shall be perpetual. However, in case of the trust or estate, its term of existence shall be coterminous with the existence of the trust or estate.

In the event of the single stockholder’s death or incapacity, he may be replaced by the designated nominee or by an alternate nominee. The single stockholder is required to designate a nominee and an alternate nominee named in the Articles of Incorporation who shall replace the single stockholder in the event of the latter’s death and/or incapacity. The written consent of both the nominee and alternate nominee shall be attached to the application for incorporation.

A sole shareholder claiming limited liability has the burden of affirmatively showing that the corporation was adequately financed. Where the single stockholder cannot prove that the property of the OPC is independent of the stockholder’s personal property, the stockholder shall be jointly and severally liable for the debts and other liabilities of the OPC. The principles of piercing the corporate veil applies with equal force to OPC as with other corporations. (RCC, sec. 130)

The first OPC organized under RA No. 11232 is the Smart Transportation and Solutions OPC, which received its certificate of incorporation on May 7, 2019. It was organized primarily to establish, operate and manage transportation services, including vehicle rental, leasing, taxi or shuttle services, and transportation of goods or persons for any person. (SEC Registers Country’s First One Person Corporation, Philippine News Agency, May 8, 2019)

OPC In India

The concept of One Person Company in India was introduced by the JJ Irani Committee, which was set up to take a comprehensive view on the changes necessary in the Companies Act, 1956 in the context of the changing economic and business environment. In their report, the Committee recommended that the law should recognize the formation of a single person economic entity in the form of ‘One Person Company’ and such entity should be provided with a simpler regime through exemptions so that the single entrepreneur is not compelled to fritter away his time, energy and resources on procedural matters. This recommendation of the JJ Irani Committee was accepted and implemented in the Companies Act, 2013, which obtained the President’s assent on 29 August 2013. (One Person Company in India: Companies Act, 2013)

A one-person company may be formed for any lawful purpose by one person. Only natural persons can incorporate a One Person Company and the person must be an Indian Citizen who has resided in India for at least 182 days during the immediately preceding one financial year. A person can incorporate a maximum of 5 OPCs. Also, the memorandum of incorporation of an OPC should include the name of another person, with prior consent, who shall, in the event of the subscriber’s death or incapacity to contract become the member of the company. Further, file the written consent of such person with the Registrar of Companies at the time of incorporation of the OPC along with its MOA. (Id.)

Some of the major relaxations in terms of compliance for a One Person Company include:

OPC’s can have just one Director; OPC’s do not require to prepare a cash flow statement as a part of the financial statement; OPC’s which do not have a Company Secretary can have the annual return signed by a Director of the Company. (Id.)

OPC under the Companies Act, 2013 is a separate legal entity having perpetual succession, which is required to be registered as per the provisions of the Companies Act, 2013. The liability to repay the loan availed by the OPC is limited only to the OPC, unlike, a sole proprietorship which is not a separate legal entity, thus making the sole proprietor personally liable for any loan or any credit facility availed. Further, registration of a sole proprietorship is not required. Rajani, et al. The One Man Show: Understanding The Concept of One Person Company)

The very essential of an OPC is that the member and nominee have to be a resident of India, which means that they stayed in India for more than 182 days during the immediately preceding one calendar year. (Id.)  The legal status of an OPC as an incorporated company gives an edge to it with respect to availing of loans from any banks as compared to a sole proprietorship. One Person Company In India: Companies Act, 2013)

OPCs have ventured into various sectors, such as construction, electricity, mining & quarrying, transport, trading, manufacturing of textiles, food, leather, just to name a few, since the loans are non-depositing security with lower rate of interest in nature as provided to small scale industries. (Id.)

OPC In Bangladesh

In Bangladesh, in order to expand and further facilitate business and investment countrywide, the Government has taken the initiative to formulate legal provisions for the establishment of One Person Company [OPC]. (Syed Azizul Iqbal, “One Person Company registration in Bangladesh”)

The term ‘One Person Company’ is where one person is the sole shareholder of the company. Any natural person can incorporate an OPC when he is the sole promoter of the company and wishes to enjoy the advantages of a registered company instead of the sole proprietorship. Although OPC is a well-established concept in many countries such as China, Turkey, Sri Lanka, UK, Australia, New Zealand, UAE, Singapore, USA, Pakistan, Nepal, India, it is a relatively new phenomenon in Bangladesh. (Md Shakibuzzaman. “Evaluating the Prospects of One Person Company in the Rising Entrepreneurial Scenario of Bangladesh”)

The shareholder of the company is a single person. There must be a nominee in case of the death of the primary shareholder. Upon death, the company will be transferred to the nominee. (One Person Company Formation & Registration Procedure in Bangladesh, S & F Consulting Firm, 2021). One sole person can register only a single one person company in Bangladesh. The owner cannot have multiple one person company. 

As the name suggests, one person company in Bangladesh has a sole shareholder. This single shareholder shall be its director as well as manager or company secretary. Other employees can be hired for managing it. (Id.)

The Companies (2nd Amendment) Bill 2020 was passed in parliament in November 2020 making legal provision for the formation of OPCs in the country. (Jasim Uddin Haroon, Bangladesh’s First Three One-Man Companies Get Going, 2021)

According to this amendment to the Companies Act 1994, an OPC needs to have a minimum paid-up capital of BDT 2.5 million to a maximum of BDT 50 million. And the minimum turnover for the businesses waiting to be registered as OPC should be BDT 10 million in the immediate past year. The experts are considering the minimum paid-up capital to be too high to encourage any small entrepreneurs to get incorporated and fearing that it will not attract the possible entrepreneurs, as well as the required turnover of crore in the previous fiscal year, seems not so well thought considering the primary objective of the amendments which was to bring the small entrepreneurs from the informal sector under the umbrella of the growing economy of the country. A comparative analysis suggests that most countries don’t have any requirements for paid-up capital and previous year’s turnovers. Furthermore, in the countries which have a minimum paid-up capital for incorporating as an OPC, the number is very low. Asian countries such as India, Pakistan, Nepal, and China have the requirements of paid-up capitals of 0.1 million in their respective currencies where Bangladesh has a significantly high minimum requirement of 2.5 million. (Md Shakibuzzman)

Even though the provisions in the Act do not incorporate any bar for a foreigner in forming an OPC, the particulars in the prescribed form of memorandum require NID of the shareholder, which will not be available for a foreigner, and thus a foreigner may not be able to form an OPC. The memorandum of an OPC must state the name of the nominee (with consent) who would become the shareholder of the company upon death or incapacity of the shareholder. While the Act is aiming to attract greater investment, OPC needs minimum paid-up capital of BDT 2.5 million, which may not be entirely consistent with the objective. In case the paid-up capital exceeds BDT 50 Million, the OPC has to be converted to other forms of companies. (One Person Company Formation & Registration Procedure in Bangladesh)

This new entity in Bangladesh is a welcoming act. The positive development will contribute to the increase of Bangladesh economy. The facilities provided by a one person company will benefit a lot of entrepreneurs in Bangladesh. The requirements are also manageable. If you are an entrepreneur and want to start a business in Bangladesh with limited investment. (Id.)

Bangladesh's company registrar has approved first three 'one-person company (OPC)' firms under a new business-ownership model that is expected to lure investments from home and abroad.Business promoters think the modus operandi for one-man company would diversify company incorporations with smaller ventures becoming formal firms, ushering in a boom-time for business if a few perceived hurdles are removed. The new-generation OPCs registered with the Registrar of Joint Stock Companies and Firms (RJSC) are: JR Aviation Services OPC, Boalia Services OPC and Akkas Uddin Mollah OPC. (Haroon)

One of the most lucrative characteristics of OPC to the entrepreneurs is that it makes the monetary and legal liability limited only to the company (not the individual) in contrast to the sole proprietorship where the individual is personally responsible for any liability that occurs from the transactions of its business operations since after incorporating an OPC, the company and the entrepreneur become two separate legal entities. The limited liability provides an environment for the entrepreneurs to have personal freedom and to take the extra risk as well as an additional responsibility. In addition to giving legal protection and tax flexibility, OPC helps the entrepreneurs to obtain monetary facilities from the banks, which will be much more interested in investing in an incorporated institution. The notion of OPC also seems to be the best option for minor enterprises looking at testing the waters as an alternative to the sole proprietorship. Furthermore, it also helps the entrepreneurs get the sole claim over the brand name as a registered company which is significant considering the growth of entrepreneurs and imposters in the online periphery of business. (Md Shakibuzzaman)

In 2020, Bangladesh ranked 168th out of 190 countries on the Global Ranking of Ease of Doing Business. This should provide a significant overall idea about the current business environment and its limitations in Bangladesh especially for the ever-growing entrepreneurs who don’t find it easy to survive. Therefore, the introduction of OPC seems like a revolutionary step towards incorporating the incredible number of entrepreneurs in the formal economic arena. (Id.)

Furthermore, to attract the booming informal sector of entrepreneurs, in the budget for the fiscal year 2021-22, the government initiated a tax reduction for the OPC from 32.5 percent to 25 percent. However, the number still seems incredibly high to make any difference and it is suggested that a tax exemption for one or two years or a reduction of tax rate under 10 percent will help the small entrepreneurs to reevaluate their positions and eventually encourage them to be incorporated as OPC. (Id.)

Corporate Governance In A One Person Corporation

A one person corporation has both pros and cons. While the structure of an OPC appears simple for being owned and managed by a single person, the quality of governance of this kind of corporation is still a vital consideration especially in preparing the business to a much bigger and complicated corporate set up.

The duties and responsibilities of the single owner are not different from those of traditional corporations. The OPC’s liability to the stakeholders remains the same. In fact, the challenge to maintain the profitability and good reputation of a corporation is even more challenging to a sole shareholder, because he does practically everything -- from the conceptualization to execution.Thus, if the knowledge, experience and in the line of business is insufficient and inadequate, the corporation shall suffer eventually.

One distinguishing theoretical foundation that can be applied in an OPC is the stakeholder’s theory. The ownership by one person of an OPC does not exempt the sole shareholder from the duties and responsibilities to the stakeholders. The OPC still has social responsibility. Just like any type of corporation, the OPC has to responsibly utilize the environmental resources. If, for instance, the OPC is engaged in water business, then the OPC has to protect the water resources. In short, corporations, whether owned by a single owner or by two or more shareholders, the corporate social responsibility remains the same.

Can fraud be still possible in an OPC? Yes, it is.

In the Philippines, the Revised Corporation Codes provide provisions that will prevent fraud on the part of the sole shareholder. This can be seen from the provision that prohibits the owner to hold the position of the corporate secretary. Likewise, the same Code mandates that the properties of the sole shareholder may be answerable to its obligations to third parties if it cannot be proven that such property is separate and distinct from the property of the corporation. The reportorial requirement and book keeping likewise manifest precautionary methods.

CONCLUSION

A one person corporation has both pros and cons. The issues of dishonesty in handling a corporation is lacking in an OPC since the sole owner is working for his own interest. The making of the policies, corporate acts, strategies, and execution depends on the judgment of the single owner. They can create and maintain the corporate culture that they think is best not only for profit-making, but to maintain its satisfactory status. Any conflicts of interest or interpersonal relationships between the board and management is likewise lacking in an OPC for obvious reasons. The owner has their own self to check, assess, and blame in the event of failure to responsibly govern their own corporation.  However, the resources of a one person corporation is quite limited. Unless the sole owner is such an expert and with “unlimited” financial resources, the governance of the company faces difficulty and the owner shall single-handedly endure these difficulties. The opportunity to go global is likewise slim and  security is a major issue. The owner is the only one who should keep the company’s reputation and ensure the skills of the employees and suppliers.

Having all these in mind, the quality of corporate governance is therefore vital as well for an OPC to survive in the corporate world. From among the theoretical foundations of corporate governance, it is the stakeholder theory which is the most applicable to an OPC governance. Enhancing the relationships between a business and the groups and individuals who can affect or are affected by it is an inevitable corporate act that can contribute to the success and security of the OPC. However, it is important to note that the limited resources and financing of an OPC is a great deal in keeping its status in the business world. It is not only the courage of an individual in establishing a one person corporation that is important, but their level of maturity as well to face all the challenges and difficulties that a one person corporation may face.

“Companies are institutions

which are a reflection of the maturity of a society.

In turn, the maturity of a society is indicated by the maturity

of the individual that live within it.”

-by: Aleksandar Rasovic

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