Corporate Governance and Other Stakeholders

Corporations exist not only for the benefit of its owners/shareholders, but also to serve the interests of other stakeholders in the society. A corporate does not exist by itself and operate in a vacuum. Other constituents of the society need to extend their help and cooperation.

The corporate will be able to provide long term shareholder value only through earning the goodwill of other stakeholders including the employees, customers, institutional investors, creditors, community at large, and the governments by being useful to them.

Corporate Governance and Employees

An organization needs both capital and labor to create wealth. Today, there is a growing realization that human capital is a source of competitive advantage. Corporates are beginning to treat labor as serious as capital because people and the knowledge they create are recognized as the most valuable assets in a company. There are a variety of ways in which the interests of the employees are well served.

1. Trade Unions2. Co-determination: employee representation on

boards of directors3. Profit sharing: all employees (not just executives)

included in the profit-sharing scheme4. Equity sharing: Under equity sharing the employees

are given an option to buying shares and thus become owners

5. Team Production Solution: Though the employees are appointed by the shareholders to safeguard their interests in the firm, they have to work for the common benefit of all the stakeholders – increasing participation of the employees in all aspects of the operations and management can boost productivity and enhance profit making

Corporate Governance and Customers Economics regards the consumer as the king Consumer decides through the market forces the

quality and quantity of goods or services produced Mahatma Gandhi considers the customer to be the

sole purpose for which an enterprise exists Yet the consumer gets on many occasions: Sub-standard products Increased prices through market manipulation Failed warranties Poor after sales service Many unfair trade practices

While good corporate governance is of considerable value to those who have invested their money in firms, that itself is not sufficient. Good governance should enhance the long-term potential of a company.

World over, it is being recognized that broader accounting by companies encompassing social performance of significance to stakeholders is the order of the day rather than mere bottom line accounting that is of interest to only stockholders.

Oil major Shell has institutionalized stakeholder consultations as part of its corporate strategy. In its statement of business principles, responsibilities toward its customers and employees are included in addition to those of the shareholders. Shell says that the company is responsible to the shareholders for providing “acceptable” returns rather than “maximized” returns

IBM’s current social responsibility strategy refers to enhancing shareholder value and to the delivery of measurable results to the society at large.

Dow Chemicals state in its vision statement “To be successful, we have to provide a balance to the needs of all four of these groups (customers, employees, shareholders, and society). If we maximize the return to any one or two of these stakeholder groups at the expense of others, we won’t survive very long”

Customer Information Needs A North American advocacy group “The

Stakeholder Alliance” is attempting to promote “more responsible capitalism by pressing corporations to become fully accountable to their stakeholders”. The Alliance has come out with its Sunshine Standards expected of the companies reporting to stakeholders- employees, customers, communities, suppliers, as well as financial investors- who contribute significantly to the success of the corporations or affected significantly by their actions.

According to Alliance these standards are intended to supersede the Generally Accepted Accounting Principles (GAAP) issued by the Financial Accounting Standards Board (FASB). The Advocacy group stresses on certain information needs of the customers:

Customer Information Needs1. Risks of injury from normal usage of products and

services2. Noise, odors and other nuisances or problems

associated with their use3. Design for recycling products4. Biodegradability of products and packaging5. Unusual lifecycle costs, including repairs, energy

consumption and disposal that will be borne by parties other than the producer or seller

6. Warnings, with appropriate details , regarding unusual contamination and adulteration, exposure and risks during production, shipping, marketing, and storage

7. And so on

Consumer Protection Acts The customer, as a stakeholder of a company

contributes towards the success of it; but he can also easily get affected by the actions of the firm. The world celebrate World Consumer Rights Day on March 15th every year. On March 15, 1962, President John F Kennedy had declared before the US Congress four major rights of the consumers:

Right to satisfaction of basic needs Right to safety Right to be informed Right to choose

The word ‘consumer’ is used to describe a customer who buys for personal use and not for business purposes. The explosion of interest in consumer matters is a very recent phenomenon. It has taken roots because of the emergence of a combination of new business methods and changing attitudes. The second half of the 20th century onward manufacturers have been directly appealing to the public through forceful national advertising and other promotional methods. The need for consumer protection has risen due to the fact that a consumer is no more in a position to rely on his own judgment alone to buy a complex product like a computer.

The US judiciary has been way ahead of other countries in recognizing and dealing with consumer problems. In India a number of acts had been passed after independence:

Prevention of Food Adulteration Act 1954 The Drugs and Magic (objectionable advertisement)

Act 1964 The Essential Commodities Act 1955 The Trade and Merchandise Marks Act 1958 The Monopolies and Restrictive Trade Practices Act

1969 The Hire Purchase Act 1972 The Standards Weight and Measures Act 1976

The Consumer Protection Act 1986

None of the above mentioned statues though proclaimed to be consumer welfare oriented, has really conferred upon an aggrieved consumer any rights to seek legal redress and recover costs and damages for injury or loans suffered by him as a result of faulty and defective goods and services bought or secured for valuable consideration.

The Consumer Protection Act 1986 (COPRA) provides following rights

The right to safety The right to be informed The right to choose The right to be heard The right to seek redressal The right to consumer education

Corporate Governance and Institutional Investors The Cadbury Committee 1992 states: “Because of their collective stake, we look to the

institutions in particular, with the backing of the institutional shareholders ‘ committee, to use their influences as owners to ensure that the companies in which they have invested comply with the code”

The Kumar Mangalam Birla Committee states: “Given the weight of their votes, the institutional

shareholders can effectively use their powers to influence the standards of corporate governance”

Types of Institutional Investors in India

Broadly there are four types:1. The development oriented financial

institutions such as IFCI, ICICI, IDBI, the state financial corporations

2. Insurance companies such as LIC, General Insurance Corporation (GIC) and their subsidiaries

3. All banks4. Al mutual funds (MFs) including UTI

Factors influencing investment decisions taken by institutional investors

Financial results and solvency Financial statements and annual

reports Investor communications Composition and quality of the board Corporate governance practices Corporate image Share price

Corporate Governance and the Community The fundamental basis of corporate

governance and responsibility in the value system of the corporation includes:

Its human resource principles-respect and dignity for all

Its dedication to accurate and transparent accounting and financial standards

Its concern for the environment, for good business ethics and conduct, for social advancement

Its over-riding passion to serve customers and to guarantee its products and services

Its insistence on fair treatment of suppliers-and competitors

Its uncompromising commitment to comply with government laws and regulations in al countries in which it operates

Its desire to work with others to lead society to a better economic standard and quality of life