Rules for Coordinating People Involved in a Company

To start a business, you usually need 'start-up capital,' a substantial amount of funds, to arrange for things like a store, machinery, and equipment. If you cannot raise the necessary funds on your own, you might start a business jointly by pooling funds with others. The company system is a mechanism that recognizes a group of investors (a 'company') formed in this way as a single business entity, treating it as if it were a single person (a legal entity) in society and acknowledging its activities. Company Law establishes rules to coordinate the interests of those involved in a company when they conflict. For example, if a company's management falters and it falls behind on loan repayments to banks or business partners, the investors' liability will be called into question. There are four types of companies, including stock companies and general partnership companies, and the distinction is primarily based on the type of liability investors bear toward the company's creditors. In a stock company, shareholders (the investors in a stock company) are not granted management authority; instead, the management of the company is entrusted to directors elected at a general shareholders' meeting. This is a feature specific to stock companies, offering the advantage of achieving efficient management by entrusting the company's operations to management experts. On the other hand, however, the interests of shareholders may be neglected due to the negligence of directors. There is also a risk that directors might try to make a quick profit using illegal means. Therefore, systems such as corporate auditors and accounting auditors are in place as bodies with the authority to check on directors. Measures are also required to align the often-divergent interests of shareholders and directors as much as possible.

The issue of so-called corporate governance is how to make directors pursue efficiency while ensuring they manage the company in compliance with the law. This involves the legislative issue of how to design the system under Company Law, as well as the operational issue of how to apply the rules of Company Law. It is a critical issue that also affects a nation's economic strength.