CS 302 Professional Issues

Chapter 1 - Basics of Company Organisation

§1.0 Motivation §1.2 Companies
§1.1 Partnerships §1.3 Company Organisation

Previous Reading: Introduction

§1.0 Motivation

No matter what employment we find ourselves in when we have graduated, we need to be aware of the basics of organisation and finance affecting us and the people around us. The purpose of these first chapters is to set the general pattern and look at some of the motivation and methods which are encountered. But remember - these notes are constructed from the viewpoint of a computer scientist trying to be aware of the world around them, not from the narrower but more precise viewpoint of a lawyer or an accountant!

So, with that preamble behind us ... legal organisation first.

Individuals can agree to do (almost) anything

Which is fine in so far as it goes, but from a commercial point of view is very restricting. Something wider and stronger is normally needed to provide a sound base for commercial activities .... and technical activities always have to be pursued in some sort of commercial context. Even the activities of research and teaching which form the purpose of a university have necessarily to be considered - well, maybe not in a commercial context, but certainly in the contexts of organisation and finance.

If properly constructed, partnerships and companies can

The key phrase in that last paragraph was that initial "if properly constructed". If we want to gain the advantages which come from formal organisation, then we have to abide by the rules! In the United Kingdom, the fundamental rules are embodied in two acts of the Westminster Parliament (though there are also many other associated acts), namely the

  • Partnerships Act 1890
  • Companies Acts 2006 / 2008
    (these new acts of course build on the previous legislation, namely the Acts of 1985 and 1989)

and there are similar sets of rules in most countries of the world.

Before moving on, let us briefly examine two phrases common in this area, two areas which we will otherwise largely ignore.

Remember, these notes are not intended to give a full guide to or interpretation of company (or any other!) laws, but rather they are intended to draw out in comprehensible and relatively informal form some of the fundamental principles.

§1.1 Partnerships

From ancient times right through to the industrial revolution, the basis of all commercial activity which wasn't church or state based was the partnership of individuals. They banded together, to share the costs and the risks ... and in the event of bad luck or lack of success the partners paid the price from their individual fortunes.

Gradually, from the seventeenth century in Europe, the idea of the company evolved - but many of the early company schemes, lacking then a protective legal framework, were even more ruinous to individuals. Think of the Darien Scheme of late seventeenth century Scotland, or the 1720's collapse in England of the "South Sea Bubble".

Nowadays, the operation of partnerships is tightly restricted; in the United Kingdom

So why do they still appear? And still flourish? One answer is that the legal framework is less restrictive than it is for companies. But another and probably more pressing one, is that some of the professional bodies still require that their members practise their skills and knowledge in that way - RIBA, the Royal British Institute of Architects, is one such - presumably on the basis that the element of personal risk tends to guarantee the quality of the work undertaken, and so reflects to the glory of the professional body. Architects can, of course, work as employees of other organisations or companies ... but if they want to practise in their own right then they do so through a partnership. Vets and dentists are usually in the same position, though they are allowed rather more flexibility.

Computer Scientists and engineers in general are spared that professional restriction, but even so - at least in the United Kingdom - it remains a not uncommon way of working for the more senior members of the profession.

§1.2 Companies

A company forms a "legal entity" in the eyes of the law, and its ownership rests with those who have purchaesed "shares" in the company ... in other words, with those who have invested money in the company.

Both quoted phrases matter! If the University of Strathclyde were not recognised formally as a legal entity (albeit, in the University's case, as a consequence of its royal charter), then it could not employ staff, or own buildings and equipment, or do almost any of the things necessary for the pursuit of research and the education of students; in particular, it could not award degrees. Much the same holds for a company, except that a company's rights derive from its position in compliance with company law. And as for financial shares ... well, the need for access to money speaks for itself.

Companies are either public or private

and they are either "unlimited" (these days, relatively rare!) or "limited" in the liabilities they face if things go wrong, any limitation being either by share or by guarantee. As an example of what this last bit can mean in practice (albeit one drawn from a charity), the class lecturer is a member (roughly, a shareholder) of the Scottish Youth Hostels Association; should SYHA ever be wound up - discontinued through insolvency, perhaps with debts running into millions of pounds - his personal liability as a member would be limited, quite possibly to as little as one pound. For the record, in case any of those taking the class should also be members of SYHA, the position changed from February 2007, when the Association, instead of being an unincorporated charitable institution changed in the eyes of the law into a charitable companty limited by guarantee; individual "hostel members" were then differentiated from the "members of the company" and so ceased to have any financial liability.

Thus a company is a legal entity (in fact a "body corporate"), the ownership of which rests with the owners of shares in the company (companies limited by guarantee are in this respect slightly different). And the commonest, or at least the most commonly noticeable, form of company is a "public limited company" - whence the commonly seen letters, plc.

To set up a company, you must naturally follow the legal requirements of the country in which the company is to be registered. In the United Kingdom, three documents form the required constitution:

(1) Memorandum of Association
(2) Articles of Association
(3) Shareholders' Agreement

We will not describe these here - they are well summarised in the recommended textbook - but you should in general terms be familiar with the three, and may be asked to write a report on them. To help in this, by courtesy of Mark Meiklejohn (a mature entrant to the Computer Science honours course, who subsequently graduated in 2007 with first class honours) an example of memorandum and articles is attached from a company for which he was previously responsible. Be warned: the file is large (circa 33MB), taking some time to download and even longer to print, so choose with care your moment for studying it!

Amongst other things, each company - indeed, each "body " must have a company secretary, who acts as the official keeper of the company's records and normally acts for it when dealing with legal matters; in the related context of the University we have the "Secretary to the University". The company secretary may be a director of the company, or they may be an outsider, a professional lawyer or accountant who undertakes that role for a fee, something particularly common with small or start-up companies.

Directors? Well, directors are

Directors can be either "non-executive" - in which case they have a responsibility for setting policy, but not for its practical implementation - or "executive", in which case they will often also be employees of the company. But both have equally the same set of responsibilities defined above.

Note the potential for conflict between the various "stakeholders" in any company, for each of them will potentially have different priorities. Who are the stakeholders?

Shareholders certainly
Employees probably
Other Companies
(who may supply components,
or purchase products)
may be
General Public perhaps

This potential for conflict is an area of active consideration in the general study of economics! Think of the problems which faced the British car industry in the last half of the twentieth century! It is also an area we shall have to reconsider when we come to review questions associated with ethical practice.

§1.3 Company Organisation

Once we have the basic concept of a company as an organised body, we are immediately led to the question of how that company might be organised. What are the forms of governance and organisation?

At least in the context of larger companies, there are really two major varieties:

Of course, there are all sorts of in-between models! And all sorts of changes from one pattern to the other and back again - of which the best example is probably the organisation of British Railways during its fifty year career as a nationalised body.

But geographical organisation can also be taken to the extreme where the activities at each location become those of an "independent" company. ICI and Rolls-Royce are two United Kingdom companies which have gone down this route, with varying degrees of central control, whilst in the computer science area we have the examples of the software engineering company Logica and the recent (2000) restructuring activities of Hewlett Packard into Agilent.

It is easy to identify the major areas into which the activities of any company divide (this simple model becomes elaborated in a later chapter):

Which should be concentrated, which distributed? There is no easy answer; much will depend on

The only general comments to be made, and they apply much more widely than simply to a company's organisational structure, both concern change.

Change has advantages ("To change is to improve, to be perfect is to have changed often" - but that was said by a nineteenth century divine, not by a manager), but it also always has costs. Change Management is one of the hardest tasks facing any company - especially a high tech company such as one in computer science - but there is always a need to be alive to the possible advantages to be gained from it.

© Paul Goldfinch 2008 Next Chapter Return to CS 302 Menu