This article has been written by Rahena Anandraj pursuing a Personal Branding Program for Corporate Leaders from Skill Arbitrage.

This article has been edited and published by Shashwat Kaushik.

Who is a stakeholder 

A ‘stakeholder’ is an individual or a group of individuals or an organisation with a financial/any other vested interest in the success of a business. In other words, stakeholders are defined as those who are likely to be affected directly or indirectly by or whose actions can affect/influence the operations of a company. The stakeholders include investors, owners, shareholders, employees, customers, clients, outsourcing partners/vendors, retainers, suppliers, the general public, local communities, governments, statutory/regulatory bodies and trade associations. However, a stakeholder is not always a shareholder. Hence, a stakeholder can be either within or outside an organisation.

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A stakeholder has an interest in the performance of a company for reasons other than stock performance or appreciation and has a dire need and deep-rooted interest in the success and prosperity of the company. The stakeholders serve as the backbone and risk-takers of any company. It is through stakeholder engagement and active participation that a company tries to understand the expectations of all stakeholders regarding their concerns on governance, strategy, company processes, policies, and performance. Effective stakeholder engagement plays a critical and crucial role in the sustainable long-term growth of the company, developing strong relationships and building trust within the company. Furthermore, stakeholder involvement in the operations of the company enables them to make informed strategic and operational changes for the smooth functioning of the company.

Stakeholders could be internal or external to a company. While internal stakeholders are individuals directly related to the company through employment, ownership or investment, external stakeholders are individuals not directly related to the Company but nevertheless affected by the actions and outcomes of the business. Examples of internal Stakeholders are employees, shareholders, investors, etc., whereas examples of external stakeholders are suppliers, creditors, Public Interest Groups, statutory/regulatory bodies, etc.

What is governance and management and how are they different from each other

‘Governance’ as per Dictionary and in layman’s understanding is the action or manner of governing state, people, organisation, etc. Management, as per Dictionary and in layman’s understanding, is the process of dealing with or controlling things, people, etc.

Now, the terms ‘government’ and ‘management’ are often misinterpreted and, accordingly, used interchangeably in similar contexts or situations. However, there exists a difference in the sense that governance is the laying out of the processes, policies, rules, and regulations, whereas management is implementing these laid out processes, policies, rules, and regulations.

Corporate governance and management

There are many laws, rules, regulations, guidelines, notifications, precedence, and circulars, as amended from time to time (hereinafter referred to as ‘applicable requisites’), that are applicable to a company. Corporate governance and management is nothing but formulating, framing, and implementing or enforcing these applicable requisites into/through the standard operating process and policies of the company in its day-to-day affairs. It is through such corporate governance and management that the company is able to uphold its values, reputation/goodwill and well-being in a holistic way. 

Corporate governance and its management can be effectively controlled only by the company’s board of directors. It is because the Board of Directors, being well-qualified, well-experienced, and well-informed, are capable of taking independent and objective decisions. 

Having ever-evolving corporate governance in place is necessary for the growth of not only the company but also a society and, consequently, the nation. The unity of corporate governance and stakeholders has been recognised as a vital element of corporate social responsibility (‘CSR’). Together. It is a sure-shot way of achieving sustainability in the long run and on a long-term basis.

How did the concept of the Stakeholder Relationship Committee find place in the Indian Companies Act, 2013?

Before the Companies Act, 2013 came into force, companies were required to constitute shareholder grievance committees. This Committee only looked at and resolved the grievances of just one category of stakeholders, viz., shareholders, and these grievances were related to nothing more than non-receipt of dividends, non-receipt of annual reports, noting changes in address, etc., and often overlooked other grievances pertaining to operations, labour, environment sustainability, service quality, corporate social responsibility, and other day-to-day affairs of the company.

This is because the shareholders own part of the public company through shares of stock, and so the shareholders interest lies in the stock’s price movement and its value increment. The shareholders do not need to have a long-term perspective on the company and can sell the stock whenever they need to. Thereby, the shareholder can usually get out at any time and reduce their losses.

This, however, lead to non-alignment of interests of various Stakeholders other than shareholders, and there is a probability of conflict of interests as a Shareholder is looking to enhance and maximise the values of the shares held by such a Shareholder, and this could be at the labour costs, reduction or elimination of company’s services, etc. 

The most efficient companies successfully manage the interests and expectations of all their stakeholders as against the general understanding that the companies are only required to maximise shareholder wealth. This is where the concept of ‘Stakeholder Capitalism’ was brought into motion. With its advent, the companies are now required to serve the interests of all their stakeholders, not only their shareholders.

Previously, Clause 49 of the Listing Agreement to the Indian Stock Exchange (with effect from 31st December 2005) was formulated for the improvement of corporate governance in all listed companies. Under the said Clause 49, a committee under the chairmanship of a non-executive director and such other members as may be decided by the board of the company would be formed to specifically address the redressal of the grievances of the security holders, i.e., shareholders, Debentureholders and other security holders. This committee looked into and resolved the grievances of security holders relating to the transfer of shares, non-receipt of the balance sheet, etc. This Clause 49 was later amended from time to time.

It is imperative to note that this provision was not replicated in the erstwhile Companies Act, 1956, although, under the Companies Act, 1956, it introduced the Shareholders Grievance Committee (SGC) to address the need of that time. As the name suggests, SGC only focused on shareholders. This perspective has since evolved on account of changes in the ground realities. The companies are now focussing on stakeholders instead of shareholders (i.e., stakeholder capitalism as opposed to shareholder capitalism); the committee was renamed the Stakeholders Relationship Committee (SRC) via Section 178(5) of the Companies Act, 2013 (hereinafter, referred to as ‘the Act’ for the sake of brevity). The Act has replaced the words ‘Shareholders’ and ‘Grievance’ in ‘SGC’ with ‘Stakeholders’ and ‘Relationship’ in ‘SRC’. Further, SRC has found its place in Regulation 20 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended from time to time (“SEBI LODR”).

Stakeholders relationship committee : governance and management

The Stakeholder’s Relationship Committee (SRC) has come into existence as one of the four mandatory Board Committees. The intention of Section 178 of the Act is to allow a company, be it public or private, to be able to constitute a SRC for better governance and management. SRC overlooks various aspects of Stakeholder’s interests.

SRC is formed at the board level of the company, and in lieu of the approval of the board of directors, SRC shall be constituted. The board of directors of a Company which consists of more than one thousand shareholders, debenture holders, deposit holders and any other security holders at any time during a financial year is to constitute a SRC. A Chairperson of such a committee shall be a non-executive director and be present at the Annual General Meeting to answer the queries of security holders (as per the provisions of the Companies Act, 2013). The minimum of three directors with at least 01 independent directors (in the case of a listed company having outstanding security receipt equity shares, a minimum of two-thirds of the SRC shall comprise independent directors) (as per the provisions of SEBI (LODR) Regulations, 2015). SRC shall meet at least once in a year.

The Act and SEBI LODR (hereinafter collectively referred to as ‘legislation’) focus on strengthening corporate governance and, thereby, enabling to maintain the internal management of the company. The legislation, by the inclusion of a separate committee (SRC), specifically addressed the grievances of all the stakeholders. The stakeholders now have a platform to voice their concerns and also suggest remedial/corrective measures to bring about improvisation in the management and the affairs of the Company. For example, SRC will seek for complaints and try to resolve those complaints, which range from transfer of shares, non-receipt of declared dividends, non-receipts of annual reports, non-receipt of interest, issuances of share certificates, general meetings, etc.

Lacunae

Although the legislation attempted for good corporate governance and management, the legislation does not provide for enabling provisions as to how this would be implemented. The attempt was made to the extent of replacement of words and not the scope of the SRC, as against the rising expectations of the stakeholders. The SRC is expected to deal with the grievances rather than building the relationship and trust. Even the composition of SRC has not been well thought of and the placing under the Act is not distinct and separate and is merely a sub-clause of Section 178 of the Act.

The SRC, being a committee, has to overlook the complaints and interests of all the stakeholders; it continues to pursue the complaints and interests of a particular set of stakeholders, i.e., shareholders. The rest of the stakeholders, like labour-related issues, client/customer servicing, SOPs/policies, etc., are often found to be neglected or given the least importance.

Conclusion

While the legislation has undoubtedly played a vital role in diligently bringing all the interests into one fold of “stakeholders,” there still remains a lot of room for improvisation.

There should be flexibility in the composition of the SRC. The roles, accountability and rights of the SRC are to be framed well, and SRC is to be made answerable on non-hearing of feedback and resolution of complaints from all Stakeholders (not restricting to a particular category, i.e., Shareholders) like the employees, vendors, clients, etc.

Of course, the change in thought process and framing of well-articulated roles, accountability, and rights of the SRC shall happen gradually and over time. Yet, this change has to begin for the health and wealth of the organisation as a whole.

Corporate governance and management, in its literal sense, cannot be made a reality in the absence of a well-balanced approach between operational transparency to stakeholders and maintaining confidentiality to facilitate effective and efficient decision-making. This is where the role of independent directors comes into play.

References

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