Stakeholders and Corporate Governance

8/11/2019 Stakeholders and Corporate Governance

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Nidhi Chauhan

School of Law

KIIT University, Bhubaneswar

Stakeholders and Corporate

Governance


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Introduction

The competitiveness and ultimate success of a

corporation is the result of teamwork that

embodies contributions from a large network of

resource providers including investors,

employees, creditors, consumers and suppliers.

The contributions of stakeholders constitute avaluable source of building profitable companies


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Contd

Some of the rights of stakeholders are notlegislated, but companies may recognize them on

account of its impact on corporate reputation and

corporate performance.

The specific mechanism dealing with stakeholderparticipation may include:

Employee representation on corporate boards,

Employee stock ownership plansProfit sharing mechanism

Stakeholder view points in certain key decisions


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Stakeholder- Definition

A stakeholder is any person, entity or

interest group that has some association

with the company. In other words, any group or individual

who can affect or is affected by the

achievement of the organization'sobjectives


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Primary Stakeholders

Primary stakeholders are those groups the firm

depends on for its survival and continued

success.

They consist of

customers,

employees,

suppliers, andshareholders


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Secondary Stakeholders

The secondary stakeholders are the groups who

do not have a contractual obligation with the firm

nor exercise any legal authority over the firm.

In other words, Secondary stakeholders are those

that influence or affect, or are influenced oraffected by, the corporation, but they are not

essential for its survival.

Eg: Mass media,Social media,

Trade associations,


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Employees as Stakeholders

Employees are the source of a companys

success

They are the backbone of an organization,

responsible for putting flesh and blood into the

organization. Participation enables employees to monitor

management.

It acts as a morale-booster leading to

improvement in the quantity and quality ofoutput.


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Contd

The employees have more knowledge and

information about their work task andprocess than the managers.

The general awareness that the

knowledge, experience and intelligence ofthose who actually do the work is not

sufficiently used.

According to Bullock Committee (U.K),

there is a need to adopt necessary

measures with the assent of workforce so

as to bring about an economic change.


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Contd

Where employees have the

representation on corporate boards,this may be beneficial for the

company in comparison to the

decisions made entirely by theboards.

The basic objective of recognizing

employees as stakeholders is to

enable corporations to establish the

environment of mutual trust.


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Contd

The employees could be associated

with corporate governance in the

following forms:

Board level participation

Profit or financial participation

Combination of participation in

decision-making and profit-sharingConsultation and information.


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Contd

Corporate managers are to reconcile

stakeholders and shareholdersneedsand interests.

If the decision making process within

corporate hierarchies were controlledby one set of stakeholders, other

stakeholders might eventually cease

to cooperate, to withhold inputs in thefuture, and try to withdraw inputs over

which they have influence.


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Contd

Breaches of social or environmental

laws bring penalties and sanctions toCorporations and diminish shareholders

revenues.

Customers and clients are stakeholderswhose satisfaction is a great challenge

to the Corporation.

No company can create great wealth forits shareholders without a stable and

growing revenue base, which comes

from customers.


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Contd Management invests in higher levels of

customer satisfaction that earns an economicreturn, there is no conflict between

maximizing shareholder value and maximizing

customer satisfaction.

Suppliers are crucial to developing andimplementing strategies that generate wealth.

Attempts to pay prices that are below marketlevels may allow achieving a greater short

term profit but they are also likely to lead to

supply disruptions or quality problems.


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Contd

Management systems are based upon

cooperation with suppliers to improve

quality, delivery-production schedules

and inventory.

Those exercises help raising both

suppliers profits and value for

shareholders.

Corporations with good human resourcerecords are in a better position to

achieve long-term profitability.


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Contd

Corporations expenses and

investment towards stakeholdersare to form an integral part of the

Governance strategy

It is to be placed under scrutiny byCorporations Committees, such as

the Audit Committee, be timely and

precisely explained to shareholders

and be consistent with the

Corporationsgeneral programme.


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Contd

In US, majority of the States authorizes

Directors to take into account theinterests of other "constituencies such

as employees, suppliers, customers,

and the local community in makingbusiness decisions.

Some permit Directors to consider the

interests of other constituencies butsome allow the Directors to define the

shareholders' long-term interests as

including the welfare of other groups.


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Contd

In the case of Dodge v. Ford Motor Co.

[204 Mich. 459, 170 N.W. 668 (1919)],Directors were accused of subordinating

shareholder interests to other interests.

In that case, the Directors refused to paydividends and instead reduced the price

to consumers.

Michigan Supreme Court affirmed thatDirectors decision did not sacrifice

shareholdersinterests.


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Corporate Social Responsibility

Business sector generating wealth and value forthe shareholders but simultaneously there are

problems of poverty, unemployment, illiteracy,

malnutrition etc. facing the nation.

the Government undertakes extensivedevelopmental initiatives through a series of

sectoral programmes.


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Contd The business sector also needs to take the

responsibility of exhibiting socially responsiblebusiness practices that ensures the distribution of

wealth and well-being of the communities in

which the business operates.

The Ministry of Corporate Affairs has decided to

bring out a set of voluntary guidelines which will

enable business to focus as well as contribute

towards the interests of the stakeholders and the

society.


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Contd

CSR is not philanthropy and CSRactivities are purely voluntary- what

companies will like to do beyond any

statutory requirement or obligation. It is expected that more and more

companies would make sincere efforts

to consider compliance with theseGuidelines.


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Contd

There may be genuine reasons forsome companies in not being able

to adopt them completely.

In such a case, companies may

inform their stakeholders about the

guidelines which the companies

have not been able to follow either

fully or partially.


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CSR- VOLUNTARY GUIDELINES

Fundamental PrincipleEach business entity should

formulate a CSR policy to guide its

strategic planning, which should bean integral part of overall businesspolicy. The policy should be framed

with the participation of variouslevel executives and should beapproved by the Board.


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Contd

CORE ELEMENTS

Care for all Stakeholders

The companies should respect the

interests of, all stakeholders, includingshareholders, employees, customers,

suppliers, society at large etc. They

should develop mechanism to informthem of inherent risks and mitigate them

where they occur.


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Contd Ethical functioning

They should not engage in business practicesthat are abusive, unfair, corrupt or anti-

competitive.

Respect for Workers' Rights and Welfare

Companies should provide a workplace

environment that is safe, hygienic and which

upholds the dignity of employees.

They should provide all employees with access totraining and development of necessary skills for

career advancement


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Contd

They should uphold the freedom of

association and the effective recognition of

the right to collective bargaining of labour,

have an effective grievance redressal system.

They should not employ child or forced labour. They should provide and maintain equality of

opportunities without any discrimination on

any grounds in recruitment and during

employment.


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Contd

Respect for Environment

Companies should take measures

to check and prevent pollution;

recycle, manage and reduce waste,

should manage natural resources in

a sustainable manner and ensure

optimal use of resources like land

and water.


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Contd

Activities for Social and InclusiveDevelopment

Depending upon their core competency and

business interest, companies should undertake

activities for economic and social development ofcommunities and geographical areas, particularly

in the vicinity of their operations. These could

include: education, skill building for livelihood of

people, health, cultural and social welfare etc.,particularly targeting at disadvantaged sections of

society.

Documents

Stakeholders and Corporate Governance