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 Unions
2. Co-determination: employee representation on
boards of directors
3. Profit sharing: all employees (not just executives)
included in the profit-sharing scheme
4. 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 Needs
1. Risks of injury from normal usage of products and
services
2. Noise, odors and other nuisances or problems
associated with their use
3. Design for recycling products
4. Biodegradability of products and packaging
5. 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 banks
4. 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