Companies Act, 2013: Incorporating Stakeholder Theory Approach into the Indian Corporate Law

Companies Act, 2013: Incorporating Stakeholder Theory Approach into the Indian Corporate Law Abstract This paper analyses the recent effort of Indian Companies Act, 2013 to incorporate stakeholder theory approach by way of significant provisions dealing with mandatory corporate social responsibility spending and director’s duty towards stakeholders. This paper identifies lack of monitoring and enforcement mechanism as major challenges in implementing the stakeholder approach in the Companies Act, 2013. This paper suggests incorporating mandatory stakeholder grievance remedial mechanism and stakeholder due diligence requirement for strengthening the stakeholder approach adopted in the Companies Act, 2013. 1. INTRODUCTION Stakeholder theory has attained much attention in the corporate governance and business ethics literature.1 It identifies the need to look beyond shareholder profit maximization model in the functioning of a corporate body. The growing recognition of stakeholder theory in corporate governance and business ethics literature has also positively influenced the legal framework regulating companies. Corporate legal frameworks, especially common law framework, have come forward to accept the need to incorporate stakeholder theory approach into company law.2 Indian company law also has moved in the direction of accepting stakeholder theory to a certain extent. In the Indian context, Companies Act, 2013 (2013 Act) has significantly changed the dimension of corporate law in India by ushering in corporate governance reform. From the perspective of stakeholder theory, the 2013 Act envisages certain significant provisions attempting to emphasize on the need to look beyond the financial performance of companies. One significant provision states minimum expenditure mandate regarding Corporate Social Responsibility (CSR). This is considered a pioneering model of regulating CSR and pushing for stakeholder theory approach in law. The 2013 Act has also incorporated a provision for duty of company directors towards stakeholder interest protection. India has followed a model similar to the United Kingdom’s Enlightened Shareholder Value model in evolving the director’s duty towards shareholders and stakeholders.3 In this context, this article attempts to analyse the Indian experience of incorporating stakeholder theory into company law. The major challenges in implementing the stakeholder approach incorporated in the Indian corporate law are discussed. 2. STAKEHOLDER THEORY AND CORPORATE LAW (A) Competing Models: Shareholder Primacy Theory and Stakeholder Theory Company law is perceived essentially as a tool enabling a business organization to further the private interest of shareholders. The crucial element of limited liability principle allows for capital risk mitigation of shareholders. The shareholders, who are owners of the company, expect the company to function optimally increasing and maximizing the shareholders’ profits. The very fact that the directors could be freely appointed and removed from the office at the interest of the shareholders is a clear indication of shareholder interest being reflected in the company law.4 The board of directors, which forms the main decision-making entity in the company structure, is controlled by the shareholders. The risk undertaken by shareholders by investing in the company is also highlighted as the reason for shareholders being legitimately interested in ensuring that company works in a manner increasing the wealth of shareholders.5 Frank Easterbook and Daniel Fischel have advocated for shareholder profit maximization model by stating that management of a company ‘must attract customers and investors by promising and delivering what those people value’.6 They also advocate shareholder profit maximization model of corporate law by stating that ‘agency cost rises and social wealth falls’7 when the company attempts to balance between shareholder interest and stakeholder and community interest.8 The much quoted and referred scholar Milton Friedman also vehemently advocates for shareholder profit maximization as the main objective of corporates.9 The principal–agent relationship problem is evident in the shareholder primacy model of corporate governance. In the principal–agent conundrum, the shareholders (who are the owners of the company) are in constant dilemma and attempt to ensure the agents (the directors and management personnel of the company) act in a manner the principal’s interest is carried forward effectively. The stakeholder concerns are neglected in the quest for maximization of shareholders interest by the directors and management personnel of the company. The Anglo-American model of company law is understood to have accepted the shareholder primacy theory in its approach.10 The lack of any explicit inclusion of the stakeholder or societal interest as the objective of corporations in Anglo-American model of company law could be considered as a reason for this perception. The competitive success of US and UK firms following shareholder primacy is an important criterion used for advocating shareholder primacy.11 Easy access to equity market and preference of international private equity and institutional investors to shareholder primacy are also highlighted as favourable reasons for stakeholder primacy.12 The stakeholder theory requires the companies to look beyond the perspective of profit maximization of the shareholders. The debate between shareholder profit maximization as the sole purpose of the company and the need for a larger stakeholder perspective in company law could be traced back to seminal articles of Adolf Berle and Merrick Dodd in Harvard Law Review.13 Various scholarly works also have put across the need to shift from shareholder primacy in the Anglo-American company law14 and have advocated for a trusteeship model of corporate governance as an alternative to the shareholder primacy model.15 Theoretical underpinning of the modern day outlook towards the stakeholder perspective could be traced to Edward Freeman.16 According to the stakeholder theory, the non-shareholder constituents being affected by the company’s functioning, including the workers, suppliers, and customers should also be considered in the decision-making process.17 The non-financial performance of the company, such as influence on environment due to the functioning of the company, would also form a pertinent part of the stakeholder concern. It is significant for managers and board of directors to take into account the impact on the wider community of stakeholders while taking decision. The normative outlook of stakeholder theory helps in bringing ethical values to functioning of the company rather than concentrating only on economic goals. (B) Stakeholder Theory and Corporate Social Responsibility The concept of CSR could be understood as ‘social imperative and social consequence’18 of business. CSR could very well be understood as inter-related to the stakeholder theory.19 There is perfect consonance in goals as far as corporate social responsibility and stakeholder theory are concerned. While the concept of CSR examines the content of responsibility a corporate owes towards the society, the stakeholder theory identifies the concerned entities towards which the corporate body have obligation.20 Both these corporate governance approaches ensure that a holistic perspective is warranted towards the functioning of a company. The ethical foundation of these two concepts is lauded and provides sufficient grounding for embedding them in corporate law and regulation. The abstract nature of CSR concept makes it difficult to be properly defined. Still, an attempt to categorize CSR, such as explicit CSR and implicit CSR, is evident in the academic literature. The ‘implicit’ CSR are stipulated through regulations and rules, which is a result of the institutional and legal framework within which the corporate body is operating.21 The ‘explicit CSR’ point towards the voluntary approach to CSR adopted by the companies.22 The emphasis on the CSR in the business ethics and corporate governance literature helps in pushing forward the stakeholder perspective in the functioning of corporations. (C) Incorporating Stakeholder Theory into Corporate Law The recognition of stakeholder theory in corporate legal framework in the United Kingdom and India is a clear sign of its increasing acceptance in contemporary times. Even in Australia and United States, attempts have been made to re-look at corporate law through the lens of stakeholder theory.23 Stakeholder theory has been already imbibed into the corporate legal framework in the continental countries. In the United Kingdom, the Enlightened Shareholder Value (ESV) approach is incorporated into the corporate law based on recommendation of the Company Law Review Steering Group.24 The ESV approach is a clear example of reorienting the shareholder primacy approach to stakeholder theory. The section 172 of UK Companies Act, 2006 stipulates the directors to consider stakeholder interest in decision making. The director’s duty to consider stakeholder interest has to be exercised ‘so long as such action will promote the success of the company for the benefit of members as a whole’.25 The ESV approach attempts to ensure that the boards of directors are not just concerned about the financial results but also the long-term impact on shareholders, society, environment, and other stakeholders.26 It is also significant to note that by way of ESV, the interest of shareholders is considered in the long-term value building rather than short-term financial gains. In this perspective, board of directors following ESV approach could decide to invest in a cleaner technology for production for long-term benefit without concentrating upon the immediate cost company would incur. The findings of ‘Sustainable Company’ project study conducted by the Department of Private Law, Oslo University, during the period 2010–14 pinpoint the need for incorporating stakeholder responsibility towards environment protection and sustainability in the corporate law.27 This project highlights that the shareholder primacy approach acts as a major hurdle for the internal decision-making process in a company to adopt sustainable and environmental friendly decisions.28 The Sustainable Company, a project with multi-jurisdictional participants, evidences the greater acceptance and push for stakeholder approach among corporate law scholars. Based on this scenario of stakeholder theory gaining prominence in the corporate law, the recent reforms in Indian corporate law incorporating stakeholder-centric provisions have to be analysed. 3. MAPPING THE EMERGENCE OF STAKEHOLDER THEORY APPROACH IN INDIAN COMPANY LAW As indicated earlier, the 2013 Act incorporated significant stakeholder theory-based regulations in the Indian corporate law. This development is significant as an explicit stakeholder perspective is being adopted through the mandatory CSR spending and director’s stakeholder responsibility. The scholars point out that certain elements of stakeholder approach such as provisions for the protection of employees and creditors could be identified even in the previous Indian legislation of Companies Act, 1956.29 However, a more concentrated effort towards embedding stakeholder perspective is evident in the revised 2013 Act. The evolution of stakeholder responsibility could be traced to the recommendations of the ‘Expert Committee on Company Law’ headed by J.J Irani. The J.J Irani Committee emphasized on the need for stakeholder concerns to be addressed and protected by the company law.30 The committee recommends the management and board of directors to function in such a way as to ‘ensure compliance with the legal framework, integrity of financial accounting and reporting systems and credibility in the eyes of the stakeholders through proper and timely disclosures’.31 (A) Pushing Stakeholder Approach Through Voluntary Guidelines Drawing inspiration from the J.J Irani Committee recommendations, the Corporate Social Responsibility Voluntary Guidelines 2009 (CSR Guidelines) was issued by the Ministry of Corporate Affairs. The CSR Guidelines insist the corporations to be concerned about the stakeholders and function in an ethical manner.32 The respect for human rights and environment protection are also emphasized as the core elements of the CSR Guidelines. The CSR Guideline is considered as a voluntary self-regulatory measure adopted by the Ministry of Corporate Affairs. Importantly, the CSR Guidelines have emphasized upon a broader perspective of CSR involving responsibility towards stakeholders to act ethically, rather than restricting to a mere philanthropic approach.33 Following the CSR Guidelines, the Ministry of Corporate Affairs issued the National Voluntary Guidelines on Socio-Economic and Environmental Responsibilities of Business, 2011 (SEER Guidelines). The SEER Guidelines identify nine principles as significant for all business entities. These principles have to be adhered to in daily functioning for the purpose of fulfilling the socio-economic and environmental responsibilities of business entities. These principles emphasize inter alia on ethical conduct, respecting human rights, responsive to stakeholders, striving for sustainability, ensuring inclusive development, creation of customer value, and protection of environment as important responsibilities of business entities.34 The SEER Guidelines encourage voluntary business responsibility reporting on observance and performance pertaining to socio-economic and environmental parameters. The business responsibility reporting under the SEER Guidelines could be identified as an extension of the CSR Guidelines in pushing forward stakeholder approach amongst the Indian companies. Hence, the emergence of stakeholder responsibility in the Indian corporate law could be traced back to these voluntary guidelines. The studies indicate that the impact of these voluntary guidelines has been positive with increase in the CSR spending by the companies.35 (B) Mandatory Corporate Social Responsibility Spending The CSR concept in the Indian context remained as a voluntary process till the 2013 Act adopted the mandatory CSR provision. The mandatory CSR provision is a paradigm shift from the voluntary nature of the CSR to regulated CSR. Corporate philanthropy as a concept existed in India even before the evolution of CSR legal and policy framework in India. The major corporate houses in India such as Tata and Aditya Birla have been quite benevolent in contributing financially as donation and charity towards various developmental activities.36 But it is for the first time in the Indian corporate legal framework, a company is insisted to spend mandatorily on CSR activities. The Indian Parliamentary Standing Committee on Finance had recommended for the inclusion of CSR provision in company law.37 The 2013 Act adopted the ‘mandatory reporting and mandatory spending’38 approach towards CSR. Generally, the CSR is considered to be a voluntary activity with the companies deciding the amount to be allocated as well as the activities under the CSR initiatives. India is probably the first country to have stipulated mandatory minimum spending on CSR.39 Even though countries such as France, Denmark, and Norway have adopted a mandatory reporting approach, there is no mandatory spending requirement, which leaves it to the discretion of the companies to allocate the amount for the purpose of CSR. Section 135 of the Indian 2013 Act stipulates that ‘at least two percent of the average net profits of the company made during the three immediately preceding financial years’40 have to be allocated for the purpose of CSR. This provision is being made applicable to the companies having: Net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year.41 The activities on which the CSR spending could be allocated are clearly stipulated in the schedule VII of the 2013 Act. The schedule VII of the 2013 Act includes activities such as poverty alleviation, education, women empowerment, child and maternal healthcare, environment protection, vocational skill development, and social business. The companies falling under the ambit of section 135 criteria need to form a CSR committee, which would be responsible for formulating the CSR policy for the company as well as monitoring it.42 The paradigm shift from a voluntary CSR to a regulated mandatory spending and mandatory reporting CSR model has met with a mixed reaction in the Indian context. The welfare state trying to push the burden of developmental activities upon the corporates had led to significant criticism raised against the mandatory CSR provision.43 At the same time, the corporate purpose of being partner for inclusive development and nation building are strong reasons advocated in favour of the mandatory CSR provision.44 (C) Director’s Stakeholder Responsibility The duties of directors are codified for the first time in India by way of the 2013 Act. Section 166 of 2013 Act that codifies director’s duty also encapsulates the obligation towards stakeholders. The recommendations provided by the Institute of Company Secretaries of India have played a significant role in ensuring stakeholder perspective being included in the director’s duties.45 Section 166(2) of 2013 Act states that: A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment. This provision places an onerous responsibility upon the board and directors to take into consideration the impact upon the stakeholders in the decision-making process. Balancing the interest of members of the company as well as the stakeholder concerns of employees, community, and environment evidences a pluralist approach being embedded in this provision. The outlook of Indian 2013 Act towards director’s stakeholder responsibility prima facie seems similar to the ESV concept enshrined in the UK Companies Act, 2006. But the textual analysis of section 166 of 2013 Act and section 172 of UK Companies Act, 2006 leads to an understanding that stakeholder protection and concern is reflected more in the Indian law.46 The practical level impact of the director’s stakeholder obligation under section 166 of 2013 Act is still not clear at this point. The success of section 166 of 2013 Act depends upon the director’s balancing of the stakeholder and shareholder demands. The judiciary is yet to interpret section 166 of 2013 Act from stakeholder perspective, which makes it further difficult at this stage to comment on how the courts would be considering the stakeholder responsibility of directors. 4. CHALLENGES IN IMPLEMENTING THE STAKEHOLDER APPROACH IN INDIAN COMPANY LAW (A) Challenges in Implementing Mandatory Model of CSR The mandatory model of CSR experimented through the 2013 Act envisages only a philanthropic approach. The mandatory spending of minimum two per cent of profit on specified activities as the sole CSR obligation narrows down the holistic and broad perspective of the CSR Guidelines to a mere philanthropic approach. As indicated earlier, the CSR Guidelines adopts a more holistic and broader perspective towards CSR involving the requirement of acting ethically towards society and stakeholders.47 Another gap in the mandatory model of CSR is the absence of any specific penalty in case of non-compliance. It is presented as a mandatory model but there is a lack of clarity regarding penalty. The ‘comply or explain’ method would not be effective in furthering a mandatory CSR culture. The scholars have pointed out the possibility of penalty for breach of director’s duty as it is board of director’s responsibility to meet mandatory CSR obligation.48 Considering the objective of mandatory CSR is to engage the corporates in developmental activities, it is significant to have clear incentives and penalties being stipulated for compliance and non-compliance, respectively. The limited number of activities earmarked for CSR spending is a notable lacuna in the present format of mandatory CSR regulation. The lack of clarity regarding the mandatory CSR was raised initially by the corporates. With the revised circular being issued, a large number of issues such as broad and liberal interpretation of activities eligible for CSR spending, accounting of salary expense incurred for employees working on CSR as CSR expenditure, are now clarified.49 More flexibility in choosing avenues for CSR spending is warranted. Evolving industrial sector-wise guidelines for CSR spending would be important and relevant. Relaxation for companies that are part of other voluntary corporate social responsibility schemes or sector-based sustainability initiatives is warranted. For example a cement-manufacturing company, which is a member of the Cement Sustainability Initiative, could be provided with certain relaxation from the mandatory CSR spending requirement in acknowledgement of holistic CSR and stakeholder-centric activities. At present, the mandatory CSR regulation under the 2013 Act fails to provide adequate flexibility and relaxation for the companies. Lack of proper monitoring mechanism for the mandatory CSR regulation is a pertinent challenge. At present, there is no ‘formal review process’50 formulated to verify the proper implementation of mandatory CSR spending. Scholars have pointed out to the possibility of siphoning of profits by promoters to organizations of their interest in the name of CSR spending.51 Non-existence of an effective monitoring process could sabotage the purpose of a mandatory CSR regulation. (B) Dilemma Regarding Implementing Director’s Duties Towards Stakeholders The director’s duty towards the stakeholders as provided for in the section 166 of 2013 Act poses a certain practical dilemma. The absence of a clear definition of the stakeholders and the difficulty in enforcing stakeholder-centric duties of directors lead to this dilemma.52 The lack of clear definition of stakeholders in the section 166 of 2013 Act leads to ambiguity. Section 166(2) of 2013 Act mentions director’s stakeholder duty towards the ‘employees’, the ‘community’, and the ‘protection of environment’. Except for the term ‘employees’, the other two terms are vague and could be referring to general public interest.53 This creates a serious challenge for the directors who are entrusted with the responsibility of balancing the shareholder interest and stakeholder concerns. Moreover, there is no provision in the 2013 Act allowing for the enforcement of stakeholder interest. It is pertinent to note that scholars have pointed out that the ‘derivative action’ or ‘class action’ suits cannot be instituted by stakeholders under the 2013 Act.54 Incorporating the stakeholder theory into corporate law framework becomes significant only when the stakeholder concerns are addressed and remedied using the legal provisions. At present, the enforcement of director’s stakeholder responsibility seems to be a major challenge. The lack of enforcement options regarding stakeholder concerns would lead to the directors adopting a non-serious approach towards the stakeholder responsibility. There is clear need to bring in clarity as to who would form stakeholder as per the 2013 Act and also provide for adequate enforcement mechanism for director’s stakeholder responsibility. 5. SUGGESTIONS FOR STRENGTHENING STAKEHOLDER APPROACH IN 2013 ACT The stakeholder-centric approach adopted in the 2013 Act is a right step in the right direction. But the implementation is ridden with challenges as discussed above. In order to ensure that challenges and hurdles in the stakeholder-centric approach could be effectively tackled, two suggestions are put forward: (i) a mandatory stakeholder grievance remedial mechanism at company level and (ii) mandatory due diligence prior to activities in which stakeholder concerns are involved. If these suggestions could be incorporated into the 2013 Act, it is expected that the stakeholder-centric approach could be strengthened. The suggestions are based on the UN Guiding Principles on Business and Human Rights, 2011 (Guiding Principles) adopted by the Human Rights Council. The Guiding Principles point out the need for access to remedy at company level and also due diligence obligation of companies.55 Even though the Guiding Principles emphasize on respecting and protection of human rights, instituting a grievance remedial measure and conducting due diligence are also significant from the perspective of stakeholder concerns. (A) Mandatory Stakeholder Grievance Remedial Mechanism The major concern regarding the director’s stakeholder responsibility under the Section 166 of 2013 Act is the lack of enforcement mechanism. Having a mandatory stakeholder grievance remedial mechanism at company level could be an ideal solution to the problem. Presently, the 2013 Act provides for a stakeholder relationship committee to be formed in companies having ‘more than one thousand shareholders, debenture-holders, deposit-holders and any other security holders’.56 But the stakeholder relationship committee is not empowered to look into the grievance of stakeholders. The function of stakeholder relationship committee at present is limited to the ‘grievances of security holders of the company’.57 The stakeholder relationship committees at company level could be identified as the initial level of addressing the grievance. This would help in bringing accountability upon the directors to address the stakeholder concerns as required under the section 166 of 2013 Act. Moreover, the major challenge of lack of enforcement option for stakeholder concerns could also be tackled. (B) Mandatory Stakeholder Due Diligence Requirement At present, there is no clear stipulation of the basis on which the stakeholder concerns has to be addressed by the board of directors under the section 166 of 2013 Act during the decision-making process. It is significant that the 2013 Act is reworked to ensure that directors are provided with clear parameters based on which the stakeholder concerns could be properly assessed. Incorporating a mandatory due diligence regarding stakeholder concerns in the 2013 Act could be an effective solution. Mandatory due diligence prior to decision making by board of directors regarding activities in which stakeholder concerns are involved provides sufficient evidence to balance shareholder and stakeholder interest. The mandatory due diligence requirement should stipulate for a wide and holistic definition of stakeholder. 6. CONCLUSION Increasing stakeholder-centric approach in the Indian corporate law is a welcome step. The 2013 Act has succeeded in incorporating the stakeholder-centric approach. But the effective implementation of stakeholder-centric provisions is a daunting task. Lack of effective penalty and monitoring mechanism in the case of mandatory CSR needs to be addressed. Moreover, lack of enforcement provision regarding director’s stakeholder responsibility under the 2013 Act raises crucial question regarding the success of embedding stakeholder approach in the company law. This article suggests for incorporation of mandatory stakeholder grievance remedial mechanism and mandatory stakeholder due diligence in the company law as feasible solution for strengthening the stakeholder-centric approach. Footnotes 1 See e.g. E Freeman et al. Stakeholder Theory: The State of the Art (Cambridge University Press New York 2010); V Baumfield ‘Stakeholder Theory from a Management Perspective: Bridging the Shareholder/Stakeholder Divide’ [2016] Australian Journal of Corporate Law 31, 187. 2 A Keay ‘Stakeholder Theory in Corporate Law: Has It Got What It Takes’ [2010] Richmond Journal of Global Law & Business 9, 249–50. 3 M Nandiwadekar and U Varottil ‘The Stakeholder Approach Towards Directors Duties Under Indian Company Law: A Comparative Analysis’ (2016) NUS Centre for Law & Business Working Paper 16/03 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2822109 (accessed 26 March 2017). 4 See e.g. I Chiyu Foundations and Anatomy of Shareholder Activism (Hart Publishing Oxford 2010) 126; P Davies ‘The Board of Directors: Composition, Structure, Duties and Powers’ (Organisation for Economic Corporation and Development) http://www.oecd.org/daf/ca/corporategovernanceprinciples/1857291.pdf (accessed 26 March 2017). 5 F Easterbrook and D Fischel ‘The Corporate Contract’ [1989] Columbia Law Review 89, 1416, 1425. 6 F Easterbook and D Fischel The Economic Structure of Corporate Law (Harvard University Press Cambridge 1996) 4. 7 Ibid at 38. 8 Ibid. 9 See M Friedman Capitalism and Freedom (University of Chicago Press Chicago 1962). 10 A Keay ‘Tackling the Issue of the Corporate Objective: An Analysis of the United Kingdom’s Enlightened Shareholder Value Approach’ [2007] Sydney Law Review 29, 577, 578–79; M Gelter ‘The Dark Side of Shareholder Influence: Managerial Autonomy and Stakeholder Orientation in Comparative Corporate Governance’ [2009] Harvard International Law Journal 50, 129, 131–32. 11 See H Hansmann and R Kraakman ‘The End of History for Corporate Law’ [2001] Georgetown Law Journal 89, 442. 12 Ibid. 13 See AA Berle ‘Corporate Powers as Powers in Trust’ [1931] Harvard Law Review 44, 1049; E Merrick Dodd ‘For Whom Are Corporate Managers Trustees?’ [1932] Harvard Law Review 45, 1145. See also Keay ‘Tackling the Issue of the Corporate Objective’ (n 10) 580–81. 14 See e.g. J Kay and A Silberston ‘Corporate Governance’ [1995] National Institute Economic Review 153, 84. 15 Ibid 90–91. 16 See E Freeman Strategic Management: A Stakeholder Approach (Pitman Boston 1984). 17 Freeman et al. Stakeholder Theory (n 1) 8–9. 18 D Matten and J Moon ‘Implicit and Explicit CSR: A Conceptual Framework for a Comparative Understanding of Corporate Social Responsibility’ [2008] Academy of Management Review 33, 404, 405. 19 D Jamali ‘A Stakeholder Approach to Corporate Social Responsibility: A Fresh Perspective into Theory and Practice’ [2008] Journal of Business Ethics 82, 213, 228–9. 20 N Kakabase, C Rozuel and L Lee-Davies ‘Corporate Social Responsibility and Stakeholder Approach: A Conceptual Review’ [2005] International Journal of Business Governance and Ethics 1, 277, 289. 21 Matten and Moon (n 18) 409. 22 Ibid. 23 K Hale ‘Corporate Law and and Stakeholders: Moving Beyond Stakeholder Statutes’ [2003] Arizona Law Review 45, 823, 831–37. 24 A Keay ‘Duty to Promote the Success of the Company: Is it Fit for Purpose’ (2010) University of Leeds School of Law, Centre for Business Law and Practice Working Paper https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1662411 (accessed 15 March 2017). 25 C Ajibo ‘A Critique of Enlightened Shareholder Value: Revisiting the Shareholder Primacy Theory’ [2014] Birbeck Law Review 2, 37, 50. 26 Keay ‘Duty to Promote the Success of the Company’ (n 24). 27 B Sjafjell et al. ‘Shareholder Primacy: The Main Barrier to Sustainable Companies’ (University of Oslo 31 January 2014) https://www.jus.uio.no/ifp/english/research/projects/sustainable-companies/news/sustainablecompanies2pagesummarycompanylaw.pdf (accessed 26 March 2017). 28 Ibid. 29 U Varottil ‘The Evolution of Corporate Law in Post-Colonial India: From Transplant to Autochthony’ [2016] American University International Law Review 31, 253, 313–14. 30 J Irani et al. ‘Expert Committee on Company Law’ (Prime Directors) http://www.primedirectors.com/pdf/JJ%20Irani%20Report-MCA.pdf (accessed 26 March 2017). 31 Ibid. 32 ‘Corporate Social Responsibility Voluntary Guidelines 2009’ (Ministry of Corporate Affairs 2009) http://www.mca.gov.in/Ministry/latestnews/CSR_Voluntary_Guidelines_24dec2009.pdf (accessed 26 March 2017). 33 Ibid. 34 ‘National Voluntary Guidelines on Socio-Economic and Environmental Responsibilities of Business’ (Ministry of Corporate Affairs 2011) http://www.mca.gov.in/Ministry/latestnews/National_Voluntary_Guidelines_2011_12jul2011.pdf (accessed 27 March 2017). 35 J Sarkar and S Sarkar ‘Corporate Social Responsibility in India – An Effort to Bridge the Welfare Gap’ (2015) Indira Gandhi Institute of Development Research Working Paper 15/23 http://www.igidr.ac.in/pdf/publication/WP-2015–023.pdf (accessed 27 February 2017). 36 AD Gupta ‘Implementing Corporate Social Responsibility in India: Issues and the Beyond’ in S Ray and S Raju (eds) Implementing Corporate Social Responsibility Indian Perspectives (Springer New Delhi 2014) 21. 37 S Gopalan and A Kamalnath ‘Mandatory Corporate Social Responsibility as a Vehicle For Reducing Inequality: An Indian Solution for Piketty and the Millennials’ [2015] Northwestern Journal of Law and Social Policy 10, 34, 62. 38 Sarkar and Sarkar (n 35). 39 C Zile ‘India’s Mandatory Corporate Social Responsibility Proposal: Creative Capitalism Meets Creative Regulation in the Global Market’ [2012] Asian Pacific Law and Policy Journal 13, 269, 294. 40 Companies Act 2013 (India), section 135(5). 41 Companies Act 2013 (India), section 135(1) 42 Companies Act 2013 (India), section 135(3). 43 Zile (n 39) 295–296. 44 Sarkar and Sarkar (n 35). 45 Nandiwadekar and Varottil ‘The Stakeholder Approach’ (n 3). 46 Ibid. 47 ‘Corporate Social Responsibility Voluntary Guidelines 2009’ (n 32). 48 Gopal and Kamalnath (n 41) 69. 49 ‘General Circular No. 21/2014 Ministry of Corporate Affairs Government of India’ (Ministry of Corporate Affairs 2014) http://www.mca.gov.in/Ministry/pdf/General_Circular_21_2014.pdf (accessed 26 March 2017). 50 Zile (n 43) 299. 51 Sarkar and Sarkar (n 35). 52 Nandiwadekar and Varottil ‘The Stakeholder Approach’ (n 3). 53 Ibid. 54 Ibid. 55 ‘Commentary on Guiding Principles on Business and Human Rights’ (UN Office of High Commissioner of Human Rights). http://www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf (accessed 20 March 2017). 56 Companies Act 2013 (India), section 178(5). 57 Companies Act 2013 (India), section 178(6). © The Author(s) 2017. 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Companies Act, 2013: Incorporating Stakeholder Theory Approach into the Indian Corporate Law

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Abstract This paper analyses the recent effort of Indian Companies Act, 2013 to incorporate stakeholder theory approach by way of significant provisions dealing with mandatory corporate social responsibility spending and director’s duty towards stakeholders. This paper identifies lack of monitoring and enforcement mechanism as major challenges in implementing the stakeholder approach in the Companies Act, 2013. This paper suggests incorporating mandatory stakeholder grievance remedial mechanism and stakeholder due diligence requirement for strengthening the stakeholder approach adopted in the Companies Act, 2013. 1. INTRODUCTION Stakeholder theory has attained much attention in the corporate governance and business ethics literature.1 It identifies the need to look beyond shareholder profit maximization model in the functioning of a corporate body. The growing recognition of stakeholder theory in corporate governance and business ethics literature has also positively influenced the legal framework regulating companies. Corporate legal frameworks, especially common law framework, have come forward to accept the need to incorporate stakeholder theory approach into company law.2 Indian company law also has moved in the direction of accepting stakeholder theory to a certain extent. In the Indian context, Companies Act, 2013 (2013 Act) has significantly changed the dimension of corporate law in India by ushering in corporate governance reform. From the perspective of stakeholder theory, the 2013 Act envisages certain significant provisions attempting to emphasize on the need to look beyond the financial performance of companies. One significant provision states minimum expenditure mandate regarding Corporate Social Responsibility (CSR). This is considered a pioneering model of regulating CSR and pushing for stakeholder theory approach in law. The 2013 Act has also incorporated a provision for duty of company directors towards stakeholder interest protection. India has followed a model similar to the United Kingdom’s Enlightened Shareholder Value model in evolving the director’s duty towards shareholders and stakeholders.3 In this context, this article attempts to analyse the Indian experience of incorporating stakeholder theory into company law. The major challenges in implementing the stakeholder approach incorporated in the Indian corporate law are discussed. 2. STAKEHOLDER THEORY AND CORPORATE LAW (A) Competing Models: Shareholder Primacy Theory and Stakeholder Theory Company law is perceived essentially as a tool enabling a business organization to further the private interest of shareholders. The crucial element of limited liability principle allows for capital risk mitigation of shareholders. The shareholders, who are owners of the company, expect the company to function optimally increasing and maximizing the shareholders’ profits. The very fact that the directors could be freely appointed and removed from the office at the interest of the shareholders is a clear indication of shareholder interest being reflected in the company law.4 The board of directors, which forms the main decision-making entity in the company structure, is controlled by the shareholders. The risk undertaken by shareholders by investing in the company is also highlighted as the reason for shareholders being legitimately interested in ensuring that company works in a manner increasing the wealth of shareholders.5 Frank Easterbook and Daniel Fischel have advocated for shareholder profit maximization model by stating that management of a company ‘must attract customers and investors by promising and delivering what those people value’.6 They also advocate shareholder profit maximization model of corporate law by stating that ‘agency cost rises and social wealth falls’7 when the company attempts to balance between shareholder interest and stakeholder and community interest.8 The much quoted and referred scholar Milton Friedman also vehemently advocates for shareholder profit maximization as the main objective of corporates.9 The principal–agent relationship problem is evident in the shareholder primacy model of corporate governance. In the principal–agent conundrum, the shareholders (who are the owners of the company) are in constant dilemma and attempt to ensure the agents (the directors and management personnel of the company) act in a manner the principal’s interest is carried forward effectively. The stakeholder concerns are neglected in the quest for maximization of shareholders interest by the directors and management personnel of the company. The Anglo-American model of company law is understood to have accepted the shareholder primacy theory in its approach.10 The lack of any explicit inclusion of the stakeholder or societal interest as the objective of corporations in Anglo-American model of company law could be considered as a reason for this perception. The competitive success of US and UK firms following shareholder primacy is an important criterion used for advocating shareholder primacy.11 Easy access to equity market and preference of international private equity and institutional investors to shareholder primacy are also highlighted as favourable reasons for stakeholder primacy.12 The stakeholder theory requires the companies to look beyond the perspective of profit maximization of the shareholders. The debate between shareholder profit maximization as the sole purpose of the company and the need for a larger stakeholder perspective in company law could be traced back to seminal articles of Adolf Berle and Merrick Dodd in Harvard Law Review.13 Various scholarly works also have put across the need to shift from shareholder primacy in the Anglo-American company law14 and have advocated for a trusteeship model of corporate governance as an alternative to the shareholder primacy model.15 Theoretical underpinning of the modern day outlook towards the stakeholder perspective could be traced to Edward Freeman.16 According to the stakeholder theory, the non-shareholder constituents being affected by the company’s functioning, including the workers, suppliers, and customers should also be considered in the decision-making process.17 The non-financial performance of the company, such as influence on environment due to the functioning of the company, would also form a pertinent part of the stakeholder concern. It is significant for managers and board of directors to take into account the impact on the wider community of stakeholders while taking decision. The normative outlook of stakeholder theory helps in bringing ethical values to functioning of the company rather than concentrating only on economic goals. (B) Stakeholder Theory and Corporate Social Responsibility The concept of CSR could be understood as ‘social imperative and social consequence’18 of business. CSR could very well be understood as inter-related to the stakeholder theory.19 There is perfect consonance in goals as far as corporate social responsibility and stakeholder theory are concerned. While the concept of CSR examines the content of responsibility a corporate owes towards the society, the stakeholder theory identifies the concerned entities towards which the corporate body have obligation.20 Both these corporate governance approaches ensure that a holistic perspective is warranted towards the functioning of a company. The ethical foundation of these two concepts is lauded and provides sufficient grounding for embedding them in corporate law and regulation. The abstract nature of CSR concept makes it difficult to be properly defined. Still, an attempt to categorize CSR, such as explicit CSR and implicit CSR, is evident in the academic literature. The ‘implicit’ CSR are stipulated through regulations and rules, which is a result of the institutional and legal framework within which the corporate body is operating.21 The ‘explicit CSR’ point towards the voluntary approach to CSR adopted by the companies.22 The emphasis on the CSR in the business ethics and corporate governance literature helps in pushing forward the stakeholder perspective in the functioning of corporations. (C) Incorporating Stakeholder Theory into Corporate Law The recognition of stakeholder theory in corporate legal framework in the United Kingdom and India is a clear sign of its increasing acceptance in contemporary times. Even in Australia and United States, attempts have been made to re-look at corporate law through the lens of stakeholder theory.23 Stakeholder theory has been already imbibed into the corporate legal framework in the continental countries. In the United Kingdom, the Enlightened Shareholder Value (ESV) approach is incorporated into the corporate law based on recommendation of the Company Law Review Steering Group.24 The ESV approach is a clear example of reorienting the shareholder primacy approach to stakeholder theory. The section 172 of UK Companies Act, 2006 stipulates the directors to consider stakeholder interest in decision making. The director’s duty to consider stakeholder interest has to be exercised ‘so long as such action will promote the success of the company for the benefit of members as a whole’.25 The ESV approach attempts to ensure that the boards of directors are not just concerned about the financial results but also the long-term impact on shareholders, society, environment, and other stakeholders.26 It is also significant to note that by way of ESV, the interest of shareholders is considered in the long-term value building rather than short-term financial gains. In this perspective, board of directors following ESV approach could decide to invest in a cleaner technology for production for long-term benefit without concentrating upon the immediate cost company would incur. The findings of ‘Sustainable Company’ project study conducted by the Department of Private Law, Oslo University, during the period 2010–14 pinpoint the need for incorporating stakeholder responsibility towards environment protection and sustainability in the corporate law.27 This project highlights that the shareholder primacy approach acts as a major hurdle for the internal decision-making process in a company to adopt sustainable and environmental friendly decisions.28 The Sustainable Company, a project with multi-jurisdictional participants, evidences the greater acceptance and push for stakeholder approach among corporate law scholars. Based on this scenario of stakeholder theory gaining prominence in the corporate law, the recent reforms in Indian corporate law incorporating stakeholder-centric provisions have to be analysed. 3. MAPPING THE EMERGENCE OF STAKEHOLDER THEORY APPROACH IN INDIAN COMPANY LAW As indicated earlier, the 2013 Act incorporated significant stakeholder theory-based regulations in the Indian corporate law. This development is significant as an explicit stakeholder perspective is being adopted through the mandatory CSR spending and director’s stakeholder responsibility. The scholars point out that certain elements of stakeholder approach such as provisions for the protection of employees and creditors could be identified even in the previous Indian legislation of Companies Act, 1956.29 However, a more concentrated effort towards embedding stakeholder perspective is evident in the revised 2013 Act. The evolution of stakeholder responsibility could be traced to the recommendations of the ‘Expert Committee on Company Law’ headed by J.J Irani. The J.J Irani Committee emphasized on the need for stakeholder concerns to be addressed and protected by the company law.30 The committee recommends the management and board of directors to function in such a way as to ‘ensure compliance with the legal framework, integrity of financial accounting and reporting systems and credibility in the eyes of the stakeholders through proper and timely disclosures’.31 (A) Pushing Stakeholder Approach Through Voluntary Guidelines Drawing inspiration from the J.J Irani Committee recommendations, the Corporate Social Responsibility Voluntary Guidelines 2009 (CSR Guidelines) was issued by the Ministry of Corporate Affairs. The CSR Guidelines insist the corporations to be concerned about the stakeholders and function in an ethical manner.32 The respect for human rights and environment protection are also emphasized as the core elements of the CSR Guidelines. The CSR Guideline is considered as a voluntary self-regulatory measure adopted by the Ministry of Corporate Affairs. Importantly, the CSR Guidelines have emphasized upon a broader perspective of CSR involving responsibility towards stakeholders to act ethically, rather than restricting to a mere philanthropic approach.33 Following the CSR Guidelines, the Ministry of Corporate Affairs issued the National Voluntary Guidelines on Socio-Economic and Environmental Responsibilities of Business, 2011 (SEER Guidelines). The SEER Guidelines identify nine principles as significant for all business entities. These principles have to be adhered to in daily functioning for the purpose of fulfilling the socio-economic and environmental responsibilities of business entities. These principles emphasize inter alia on ethical conduct, respecting human rights, responsive to stakeholders, striving for sustainability, ensuring inclusive development, creation of customer value, and protection of environment as important responsibilities of business entities.34 The SEER Guidelines encourage voluntary business responsibility reporting on observance and performance pertaining to socio-economic and environmental parameters. The business responsibility reporting under the SEER Guidelines could be identified as an extension of the CSR Guidelines in pushing forward stakeholder approach amongst the Indian companies. Hence, the emergence of stakeholder responsibility in the Indian corporate law could be traced back to these voluntary guidelines. The studies indicate that the impact of these voluntary guidelines has been positive with increase in the CSR spending by the companies.35 (B) Mandatory Corporate Social Responsibility Spending The CSR concept in the Indian context remained as a voluntary process till the 2013 Act adopted the mandatory CSR provision. The mandatory CSR provision is a paradigm shift from the voluntary nature of the CSR to regulated CSR. Corporate philanthropy as a concept existed in India even before the evolution of CSR legal and policy framework in India. The major corporate houses in India such as Tata and Aditya Birla have been quite benevolent in contributing financially as donation and charity towards various developmental activities.36 But it is for the first time in the Indian corporate legal framework, a company is insisted to spend mandatorily on CSR activities. The Indian Parliamentary Standing Committee on Finance had recommended for the inclusion of CSR provision in company law.37 The 2013 Act adopted the ‘mandatory reporting and mandatory spending’38 approach towards CSR. Generally, the CSR is considered to be a voluntary activity with the companies deciding the amount to be allocated as well as the activities under the CSR initiatives. India is probably the first country to have stipulated mandatory minimum spending on CSR.39 Even though countries such as France, Denmark, and Norway have adopted a mandatory reporting approach, there is no mandatory spending requirement, which leaves it to the discretion of the companies to allocate the amount for the purpose of CSR. Section 135 of the Indian 2013 Act stipulates that ‘at least two percent of the average net profits of the company made during the three immediately preceding financial years’40 have to be allocated for the purpose of CSR. This provision is being made applicable to the companies having: Net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year.41 The activities on which the CSR spending could be allocated are clearly stipulated in the schedule VII of the 2013 Act. The schedule VII of the 2013 Act includes activities such as poverty alleviation, education, women empowerment, child and maternal healthcare, environment protection, vocational skill development, and social business. The companies falling under the ambit of section 135 criteria need to form a CSR committee, which would be responsible for formulating the CSR policy for the company as well as monitoring it.42 The paradigm shift from a voluntary CSR to a regulated mandatory spending and mandatory reporting CSR model has met with a mixed reaction in the Indian context. The welfare state trying to push the burden of developmental activities upon the corporates had led to significant criticism raised against the mandatory CSR provision.43 At the same time, the corporate purpose of being partner for inclusive development and nation building are strong reasons advocated in favour of the mandatory CSR provision.44 (C) Director’s Stakeholder Responsibility The duties of directors are codified for the first time in India by way of the 2013 Act. Section 166 of 2013 Act that codifies director’s duty also encapsulates the obligation towards stakeholders. The recommendations provided by the Institute of Company Secretaries of India have played a significant role in ensuring stakeholder perspective being included in the director’s duties.45 Section 166(2) of 2013 Act states that: A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment. This provision places an onerous responsibility upon the board and directors to take into consideration the impact upon the stakeholders in the decision-making process. Balancing the interest of members of the company as well as the stakeholder concerns of employees, community, and environment evidences a pluralist approach being embedded in this provision. The outlook of Indian 2013 Act towards director’s stakeholder responsibility prima facie seems similar to the ESV concept enshrined in the UK Companies Act, 2006. But the textual analysis of section 166 of 2013 Act and section 172 of UK Companies Act, 2006 leads to an understanding that stakeholder protection and concern is reflected more in the Indian law.46 The practical level impact of the director’s stakeholder obligation under section 166 of 2013 Act is still not clear at this point. The success of section 166 of 2013 Act depends upon the director’s balancing of the stakeholder and shareholder demands. The judiciary is yet to interpret section 166 of 2013 Act from stakeholder perspective, which makes it further difficult at this stage to comment on how the courts would be considering the stakeholder responsibility of directors. 4. CHALLENGES IN IMPLEMENTING THE STAKEHOLDER APPROACH IN INDIAN COMPANY LAW (A) Challenges in Implementing Mandatory Model of CSR The mandatory model of CSR experimented through the 2013 Act envisages only a philanthropic approach. The mandatory spending of minimum two per cent of profit on specified activities as the sole CSR obligation narrows down the holistic and broad perspective of the CSR Guidelines to a mere philanthropic approach. As indicated earlier, the CSR Guidelines adopts a more holistic and broader perspective towards CSR involving the requirement of acting ethically towards society and stakeholders.47 Another gap in the mandatory model of CSR is the absence of any specific penalty in case of non-compliance. It is presented as a mandatory model but there is a lack of clarity regarding penalty. The ‘comply or explain’ method would not be effective in furthering a mandatory CSR culture. The scholars have pointed out the possibility of penalty for breach of director’s duty as it is board of director’s responsibility to meet mandatory CSR obligation.48 Considering the objective of mandatory CSR is to engage the corporates in developmental activities, it is significant to have clear incentives and penalties being stipulated for compliance and non-compliance, respectively. The limited number of activities earmarked for CSR spending is a notable lacuna in the present format of mandatory CSR regulation. The lack of clarity regarding the mandatory CSR was raised initially by the corporates. With the revised circular being issued, a large number of issues such as broad and liberal interpretation of activities eligible for CSR spending, accounting of salary expense incurred for employees working on CSR as CSR expenditure, are now clarified.49 More flexibility in choosing avenues for CSR spending is warranted. Evolving industrial sector-wise guidelines for CSR spending would be important and relevant. Relaxation for companies that are part of other voluntary corporate social responsibility schemes or sector-based sustainability initiatives is warranted. For example a cement-manufacturing company, which is a member of the Cement Sustainability Initiative, could be provided with certain relaxation from the mandatory CSR spending requirement in acknowledgement of holistic CSR and stakeholder-centric activities. At present, the mandatory CSR regulation under the 2013 Act fails to provide adequate flexibility and relaxation for the companies. Lack of proper monitoring mechanism for the mandatory CSR regulation is a pertinent challenge. At present, there is no ‘formal review process’50 formulated to verify the proper implementation of mandatory CSR spending. Scholars have pointed out to the possibility of siphoning of profits by promoters to organizations of their interest in the name of CSR spending.51 Non-existence of an effective monitoring process could sabotage the purpose of a mandatory CSR regulation. (B) Dilemma Regarding Implementing Director’s Duties Towards Stakeholders The director’s duty towards the stakeholders as provided for in the section 166 of 2013 Act poses a certain practical dilemma. The absence of a clear definition of the stakeholders and the difficulty in enforcing stakeholder-centric duties of directors lead to this dilemma.52 The lack of clear definition of stakeholders in the section 166 of 2013 Act leads to ambiguity. Section 166(2) of 2013 Act mentions director’s stakeholder duty towards the ‘employees’, the ‘community’, and the ‘protection of environment’. Except for the term ‘employees’, the other two terms are vague and could be referring to general public interest.53 This creates a serious challenge for the directors who are entrusted with the responsibility of balancing the shareholder interest and stakeholder concerns. Moreover, there is no provision in the 2013 Act allowing for the enforcement of stakeholder interest. It is pertinent to note that scholars have pointed out that the ‘derivative action’ or ‘class action’ suits cannot be instituted by stakeholders under the 2013 Act.54 Incorporating the stakeholder theory into corporate law framework becomes significant only when the stakeholder concerns are addressed and remedied using the legal provisions. At present, the enforcement of director’s stakeholder responsibility seems to be a major challenge. The lack of enforcement options regarding stakeholder concerns would lead to the directors adopting a non-serious approach towards the stakeholder responsibility. There is clear need to bring in clarity as to who would form stakeholder as per the 2013 Act and also provide for adequate enforcement mechanism for director’s stakeholder responsibility. 5. SUGGESTIONS FOR STRENGTHENING STAKEHOLDER APPROACH IN 2013 ACT The stakeholder-centric approach adopted in the 2013 Act is a right step in the right direction. But the implementation is ridden with challenges as discussed above. In order to ensure that challenges and hurdles in the stakeholder-centric approach could be effectively tackled, two suggestions are put forward: (i) a mandatory stakeholder grievance remedial mechanism at company level and (ii) mandatory due diligence prior to activities in which stakeholder concerns are involved. If these suggestions could be incorporated into the 2013 Act, it is expected that the stakeholder-centric approach could be strengthened. The suggestions are based on the UN Guiding Principles on Business and Human Rights, 2011 (Guiding Principles) adopted by the Human Rights Council. The Guiding Principles point out the need for access to remedy at company level and also due diligence obligation of companies.55 Even though the Guiding Principles emphasize on respecting and protection of human rights, instituting a grievance remedial measure and conducting due diligence are also significant from the perspective of stakeholder concerns. (A) Mandatory Stakeholder Grievance Remedial Mechanism The major concern regarding the director’s stakeholder responsibility under the Section 166 of 2013 Act is the lack of enforcement mechanism. Having a mandatory stakeholder grievance remedial mechanism at company level could be an ideal solution to the problem. Presently, the 2013 Act provides for a stakeholder relationship committee to be formed in companies having ‘more than one thousand shareholders, debenture-holders, deposit-holders and any other security holders’.56 But the stakeholder relationship committee is not empowered to look into the grievance of stakeholders. The function of stakeholder relationship committee at present is limited to the ‘grievances of security holders of the company’.57 The stakeholder relationship committees at company level could be identified as the initial level of addressing the grievance. This would help in bringing accountability upon the directors to address the stakeholder concerns as required under the section 166 of 2013 Act. Moreover, the major challenge of lack of enforcement option for stakeholder concerns could also be tackled. (B) Mandatory Stakeholder Due Diligence Requirement At present, there is no clear stipulation of the basis on which the stakeholder concerns has to be addressed by the board of directors under the section 166 of 2013 Act during the decision-making process. It is significant that the 2013 Act is reworked to ensure that directors are provided with clear parameters based on which the stakeholder concerns could be properly assessed. Incorporating a mandatory due diligence regarding stakeholder concerns in the 2013 Act could be an effective solution. Mandatory due diligence prior to decision making by board of directors regarding activities in which stakeholder concerns are involved provides sufficient evidence to balance shareholder and stakeholder interest. The mandatory due diligence requirement should stipulate for a wide and holistic definition of stakeholder. 6. CONCLUSION Increasing stakeholder-centric approach in the Indian corporate law is a welcome step. The 2013 Act has succeeded in incorporating the stakeholder-centric approach. But the effective implementation of stakeholder-centric provisions is a daunting task. Lack of effective penalty and monitoring mechanism in the case of mandatory CSR needs to be addressed. Moreover, lack of enforcement provision regarding director’s stakeholder responsibility under the 2013 Act raises crucial question regarding the success of embedding stakeholder approach in the company law. This article suggests for incorporation of mandatory stakeholder grievance remedial mechanism and mandatory stakeholder due diligence in the company law as feasible solution for strengthening the stakeholder-centric approach. Footnotes 1 See e.g. E Freeman et al. Stakeholder Theory: The State of the Art (Cambridge University Press New York 2010); V Baumfield ‘Stakeholder Theory from a Management Perspective: Bridging the Shareholder/Stakeholder Divide’ [2016] Australian Journal of Corporate Law 31, 187. 2 A Keay ‘Stakeholder Theory in Corporate Law: Has It Got What It Takes’ [2010] Richmond Journal of Global Law & Business 9, 249–50. 3 M Nandiwadekar and U Varottil ‘The Stakeholder Approach Towards Directors Duties Under Indian Company Law: A Comparative Analysis’ (2016) NUS Centre for Law & Business Working Paper 16/03 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2822109 (accessed 26 March 2017). 4 See e.g. I Chiyu Foundations and Anatomy of Shareholder Activism (Hart Publishing Oxford 2010) 126; P Davies ‘The Board of Directors: Composition, Structure, Duties and Powers’ (Organisation for Economic Corporation and Development) http://www.oecd.org/daf/ca/corporategovernanceprinciples/1857291.pdf (accessed 26 March 2017). 5 F Easterbrook and D Fischel ‘The Corporate Contract’ [1989] Columbia Law Review 89, 1416, 1425. 6 F Easterbook and D Fischel The Economic Structure of Corporate Law (Harvard University Press Cambridge 1996) 4. 7 Ibid at 38. 8 Ibid. 9 See M Friedman Capitalism and Freedom (University of Chicago Press Chicago 1962). 10 A Keay ‘Tackling the Issue of the Corporate Objective: An Analysis of the United Kingdom’s Enlightened Shareholder Value Approach’ [2007] Sydney Law Review 29, 577, 578–79; M Gelter ‘The Dark Side of Shareholder Influence: Managerial Autonomy and Stakeholder Orientation in Comparative Corporate Governance’ [2009] Harvard International Law Journal 50, 129, 131–32. 11 See H Hansmann and R Kraakman ‘The End of History for Corporate Law’ [2001] Georgetown Law Journal 89, 442. 12 Ibid. 13 See AA Berle ‘Corporate Powers as Powers in Trust’ [1931] Harvard Law Review 44, 1049; E Merrick Dodd ‘For Whom Are Corporate Managers Trustees?’ [1932] Harvard Law Review 45, 1145. See also Keay ‘Tackling the Issue of the Corporate Objective’ (n 10) 580–81. 14 See e.g. J Kay and A Silberston ‘Corporate Governance’ [1995] National Institute Economic Review 153, 84. 15 Ibid 90–91. 16 See E Freeman Strategic Management: A Stakeholder Approach (Pitman Boston 1984). 17 Freeman et al. Stakeholder Theory (n 1) 8–9. 18 D Matten and J Moon ‘Implicit and Explicit CSR: A Conceptual Framework for a Comparative Understanding of Corporate Social Responsibility’ [2008] Academy of Management Review 33, 404, 405. 19 D Jamali ‘A Stakeholder Approach to Corporate Social Responsibility: A Fresh Perspective into Theory and Practice’ [2008] Journal of Business Ethics 82, 213, 228–9. 20 N Kakabase, C Rozuel and L Lee-Davies ‘Corporate Social Responsibility and Stakeholder Approach: A Conceptual Review’ [2005] International Journal of Business Governance and Ethics 1, 277, 289. 21 Matten and Moon (n 18) 409. 22 Ibid. 23 K Hale ‘Corporate Law and and Stakeholders: Moving Beyond Stakeholder Statutes’ [2003] Arizona Law Review 45, 823, 831–37. 24 A Keay ‘Duty to Promote the Success of the Company: Is it Fit for Purpose’ (2010) University of Leeds School of Law, Centre for Business Law and Practice Working Paper https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1662411 (accessed 15 March 2017). 25 C Ajibo ‘A Critique of Enlightened Shareholder Value: Revisiting the Shareholder Primacy Theory’ [2014] Birbeck Law Review 2, 37, 50. 26 Keay ‘Duty to Promote the Success of the Company’ (n 24). 27 B Sjafjell et al. ‘Shareholder Primacy: The Main Barrier to Sustainable Companies’ (University of Oslo 31 January 2014) https://www.jus.uio.no/ifp/english/research/projects/sustainable-companies/news/sustainablecompanies2pagesummarycompanylaw.pdf (accessed 26 March 2017). 28 Ibid. 29 U Varottil ‘The Evolution of Corporate Law in Post-Colonial India: From Transplant to Autochthony’ [2016] American University International Law Review 31, 253, 313–14. 30 J Irani et al. ‘Expert Committee on Company Law’ (Prime Directors) http://www.primedirectors.com/pdf/JJ%20Irani%20Report-MCA.pdf (accessed 26 March 2017). 31 Ibid. 32 ‘Corporate Social Responsibility Voluntary Guidelines 2009’ (Ministry of Corporate Affairs 2009) http://www.mca.gov.in/Ministry/latestnews/CSR_Voluntary_Guidelines_24dec2009.pdf (accessed 26 March 2017). 33 Ibid. 34 ‘National Voluntary Guidelines on Socio-Economic and Environmental Responsibilities of Business’ (Ministry of Corporate Affairs 2011) http://www.mca.gov.in/Ministry/latestnews/National_Voluntary_Guidelines_2011_12jul2011.pdf (accessed 27 March 2017). 35 J Sarkar and S Sarkar ‘Corporate Social Responsibility in India – An Effort to Bridge the Welfare Gap’ (2015) Indira Gandhi Institute of Development Research Working Paper 15/23 http://www.igidr.ac.in/pdf/publication/WP-2015–023.pdf (accessed 27 February 2017). 36 AD Gupta ‘Implementing Corporate Social Responsibility in India: Issues and the Beyond’ in S Ray and S Raju (eds) Implementing Corporate Social Responsibility Indian Perspectives (Springer New Delhi 2014) 21. 37 S Gopalan and A Kamalnath ‘Mandatory Corporate Social Responsibility as a Vehicle For Reducing Inequality: An Indian Solution for Piketty and the Millennials’ [2015] Northwestern Journal of Law and Social Policy 10, 34, 62. 38 Sarkar and Sarkar (n 35). 39 C Zile ‘India’s Mandatory Corporate Social Responsibility Proposal: Creative Capitalism Meets Creative Regulation in the Global Market’ [2012] Asian Pacific Law and Policy Journal 13, 269, 294. 40 Companies Act 2013 (India), section 135(5). 41 Companies Act 2013 (India), section 135(1) 42 Companies Act 2013 (India), section 135(3). 43 Zile (n 39) 295–296. 44 Sarkar and Sarkar (n 35). 45 Nandiwadekar and Varottil ‘The Stakeholder Approach’ (n 3). 46 Ibid. 47 ‘Corporate Social Responsibility Voluntary Guidelines 2009’ (n 32). 48 Gopal and Kamalnath (n 41) 69. 49 ‘General Circular No. 21/2014 Ministry of Corporate Affairs Government of India’ (Ministry of Corporate Affairs 2014) http://www.mca.gov.in/Ministry/pdf/General_Circular_21_2014.pdf (accessed 26 March 2017). 50 Zile (n 43) 299. 51 Sarkar and Sarkar (n 35). 52 Nandiwadekar and Varottil ‘The Stakeholder Approach’ (n 3). 53 Ibid. 54 Ibid. 55 ‘Commentary on Guiding Principles on Business and Human Rights’ (UN Office of High Commissioner of Human Rights). http://www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf (accessed 20 March 2017). 56 Companies Act 2013 (India), section 178(5). 57 Companies Act 2013 (India), section 178(6). © The Author(s) 2017. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model)

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Statute Law ReviewOxford University Press

Published: Oct 11, 2018

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