How can corporate governance evolve to better serve all stakeholders in India?

Recent corporate developments have thrown up key questions on the evolving nature of corporate governance and role of directors. Scholarship on corporate governance is largely united on some key features - the board needs to be aligned with business objectives; it needs to contribute by way of both monitoring and strategic oversight and its expertise and networks; needs of various stakeholders must be balanced.

Within this larger construct, different perspectives have emerged due to differing priorities, the most well-known being the principal-agent framework. Agency theory highlights that efficiency requires aligning residual claimants (shareholders) with decision-makers, but recognises costs that arise when ownership and control diverge, and the possibility that managers may pursue self-interest.

Good governance minimises these agency costs through monitoring, incentives and appropriate allocation of residual rights. Indian corporate law recognises majority voting power. Yet, Section 166 imposes fiduciary duties on directors to act in good faith for the benefit of the members as a whole. To enable this, directors must exercise independent judgement and, therefore, they are not bound to follow instructions of the controlling shareholder.

But the principal-agent approach can be criticised for being too owner-centric. The team-production perspective includes not just owners and managers, but also employees, suppliers and others who make firm-specific investments. This view posits that corporate governance must ensure these parties have confidence they will share in the gains from their efforts and firm-specific investments. From this perspective, the board's role is to coordinate the team and ensure that benefits are so allocated to keep the productive coalition intact, rather than merely aligning owners and managers.

The stakeholder perspective further broadens the list of participant-stakeholders. The objective of corporate governance under this view is to create value for multiple stakeholders, including shareholders, employees, customers, vendors, communities and the environment. This is more of a normative approach. Indian law has incorporated related principles through Section 166's reference to the community and environment, CSR obligations and ESG disclosure requirements, though these remain secondary to the directors' primary duty to the company.

Mohandas Gandhi believed that owners should act as caretakers of wealth. The stewardship perspective comes quite close to that notion in spirit. According to this view, managers - and those who control the firm - can identify with the organisation's success and work in its interest rather than purely for self-interest. The importance of this perspective lies in its unambiguous view that both owners and managers need to serve the organisation.

This principle is well-enshrined in India's corporate law: directors need not follow instructions of the majority shareholder but must exercise independent judgement in the interest of the company.

Most businesses in India are owned by founders or families, who have immense power over management. Historically, risk has been that the majority owner may align with managers and use corporate assets for his own self-interest. The concern, therefore, has been that together, large equity owners and managers may form a group of insiders and undertake self-serving decisions.

Laws, therefore, have attempted to limit powers of insiders to ensure a balance is maintained with other stakeholders. Section 166 of Companies Act lays out quite clearly the role of all directors and Schedule 4 of independent directors in this respect.

Corporate law may not prescribe a precise formula, but it does lay out clear principles of fiduciary duty to the company and independent judgement. As per both the efficiency principles reflected in scholarship on governance and Companies Act and case law, the board's objective is to work in the interest of the company and its members as a whole, while remaining attentive to other key stakeholders.

Assessing board performance, therefore, requires a close look at the following issues:

• Are those in control of the corporation respectful of the company's objects and long-term value?
• How does the board protect minority shareholders' interests and ensure viable exit or fair treatment?
• Does the board enable the majority to exercise its legitimate influence within fiduciary bounds?
• What necessary checks and balances have been placed on insiders, whether managers or controlling shareholders?

Tackle these, and one should have a reliable company-individual corporate alignment.