Nidhi Chauhan

School of Law
KIIT University, Bhubaneswar
Stakeholders and Corporate
Governance
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 a
valuable source of building profitable companies
Contd

Some of the rights of stakeholders are not
legislated, but companies may recognize them on
account of its impact on corporate reputation and
corporate performance.
The specific mechanism dealing with stakeholder
participation may include:
Employee representation on corporate boards,
Employee stock ownership plans
Profit sharing mechanism
Stakeholder view points in certain key decisions
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's
objectives
Primary Stakeholders

Primary stakeholders are those groups the firm
depends on for its survival and continued
success.
They consist of
customers,
employees,
suppliers, and
shareholders
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 or
affected by, the corporation, but they are not
essential for its survival.

Eg: Mass media,
Social media,
Trade associations,
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 of
output.
Contd
The employees have more knowledge and
information about their work task and
process than the managers.
The general awareness that the
knowledge, experience and intelligence of
those 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.
Contd
Where employees have the
representation on corporate boards,
this may be beneficial for the
company in comparison to the
decisions made entirely by the
boards.
The basic objective of recognizing
employees as stakeholders is to
enable corporations to establish the
environment of mutual trust.
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-sharing
Consultation and information.
Contd
Corporate managers are to reconcile
stakeholders and shareholders needs
and interests.
If the decision making process within
corporate hierarchies were controlled
by one set of stakeholders, other
stakeholders might eventually cease
to cooperate, to withhold inputs in the
future, and try to withdraw inputs over
which they have influence.
Contd
Breaches of social or environmental
laws bring penalties and sanctions to
Corporations and diminish shareholders
revenues.
Customers and clients are stakeholders
whose satisfaction is a great challenge
to the Corporation.
No company can create great wealth for
its shareholders without a stable and
growing revenue base, which comes
from customers.
Contd
Management invests in higher levels of
customer satisfaction that earns an economic
return, there is no conflict between
maximizing shareholder value and maximizing
customer satisfaction.
Suppliers are crucial to developing and
implementing strategies that generate wealth.

Attempts to pay prices that are below market
levels may allow achieving a greater short
term profit but they are also likely to lead to
supply disruptions or quality problems.
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 resource
records are in a better position to
achieve long-term profitability.
Contd
Corporations expenses and
investment towards stakeholders
are to form an integral part of the
Governance strategy
It is to be placed under scrutiny by
Corporations Committees, such as
the Audit Committee, be timely and
precisely explained to shareholders
and be consistent with the
Corporations general programme.
Contd
In US, majority of the States authorizes
Directors to take into account the
interests of other "constituencies such
as employees, suppliers, customers,
and the local community in making
business decisions.
Some permit Directors to consider the
interests of other constituencies but
some allow the Directors to define the
shareholders' long-term interests as
including the welfare of other groups.

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 pay
dividends and instead reduced the price
to consumers.
Michigan Supreme Court affirmed that
Directors decision did not sacrifice
shareholders interests.
Corporate Social Responsibility
Business sector generating wealth and value for
the shareholders but simultaneously there are
problems of poverty, unemployment, illiteracy,
malnutrition etc. facing the nation.
the Government undertakes extensive
developmental initiatives through a series of
sectoral programmes.
Contd
The business sector also needs to take the
responsibility of exhibiting socially responsible
business 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.

Contd
By exhibiting socially, environmentally and
ethically responsible behaviour in governance of
its operations, the business can generate value
and long term sustainability for itself while making
positive contribution in the betterment of the
society.
Companies with effective CSR, have image of
socially responsible companies, achieve
sustainable growth in their operations in the long
run and their products and services are preferred
by the customers.
Contd
CSR is not philanthropy and CSR
activities 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 these
Guidelines.
Contd
There may be genuine reasons for
some 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.
CSR- VOLUNTARY GUIDELINES
Fundamental Principle
Each business entity should
formulate a CSR policy to guide its
strategic planning, which should be
an integral part of overall business
policy. The policy should be framed
with the participation of various
level executives and should be
approved by the Board.
Contd
CORE ELEMENTS
Care for all Stakeholders
The companies should respect the
interests of, all stakeholders, including
shareholders, employees, customers,
suppliers, society at large etc. They
should develop mechanism to inform
them of inherent risks and mitigate them
where they occur.
Contd
Ethical functioning
They should not engage in business practices
that 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 to
training and development of necessary skills for
career advancement
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.
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.
Contd
Activities for Social and Inclusive
Development
Depending upon their core competency and
business interest, companies should undertake
activities for economic and social development of
communities 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.