Provisions for the stakeholder relationship Committee have now been introduced under Section (5) of the Companies Act, (“Act“). Tier-II conflicts arise when a board member's duty of loyalty to stakeholders or the through compensation, favors, a relationship, or psychological manipulation. .. other stakeholders in their 10K reports – words including air, carbon, child. STAKEHOLDERS RELATIONSHIP COMMITTEE. Type: Governance Document. Owner: Board of Directors. Custodian: Effective Date: Review Schedule: Annual.
This committee is formed to resolve grievances of the security holders of the company including complaints related to the transfer of shares, non-receipt of balance sheet, non- receipt of declared dividends, etc.
One of the main focuses of the Act is to strengthen corporate governance by introducing strict provisions to maintain the internal management of the company. The Act by the inclusion of a separate committee to specifically address the grievances of the stakeholders provides not only a podium for them to voice their concerns but also the freedom and power to correct processes that affect the company.
Measures of this sort help to improve the management and affairs of the company. Section 5 of the Act provides for the formation of a stakeholder relationship committee. This is a board committee or committee formed at the board level of a company.
The four tiers of conflict of interest faced by board directors
The board of directors of a company which consists of more than one thousand shareholders, debenture holders, deposit holders and any other security holders is to constitute a stakeholders relationship committee. The Act has allowed the inclusion of any security holders to qualify for the number of one thousand security holders along with shareholders, debenture holders, and deposit holders.
Debentures have been defined  to include debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not. Deposits have been defined to include any receipt of money by way of deposit or loan or in any other form by a company but does not include such categories of the amount as may be prescribed in consultation with the Reserve Bank of India.
The intention is to allow a company be it public or private to be able to constitute a stakeholder relationship committee for better governance and management.
The qualification of one thousand such shareholders, debenture holders, deposit holders and any other security holders may be considered at any time during a financial year.
An Overview On Stakeholder Relationship Committee
This requirement also makes it more flexible for a company to manage its number of members to be eligible to constitute a stakeholders relationship committee. Composition of the Stakeholder Relationship Committee Such a stakeholders relationship Committee shall consist of a chairperson who shall be a non-executive director and shall have any other members as may be decided by the Board. A non-executive director is one who is not involved in the day to day management and operations of the company and does not form part of the executive decisions of the company.
Investors in a company usually prefer to be appointed as non-executive directors so they need not bear the liabilities of the acts or omissions carried out by the company and its founder directors.
Apart from the chairperson, the board has the discretion to decide any number and qualification of members of this committee. Although the discretion of the board is a good way to permit the formation of the committee, it should always be in the best interests of the company. There should not be a member of this committee who may be an interested party to a dispute or non-compliance that has occurred in the company and referred to the stakeholder relationship committee.
The board should have a policy in place to decide the members of the committee to serve the best interests of the company.Justice Venkatachaliah speaks at the Stakeholder Consultations on Women's Safety
Investors who provide financial assistance to a company also usually include the appointment of their representatives on board committees such as stakeholder relationship committee, audit committee, etc.
Such investor directors usually of a non-executive nature should have sufficient knowledge of the operations or the management of the company to be able to contribute productively to such committees. The board representatives may also have a casting vote in their favor in the event of a dispute that occurs in decisions or resolutions by such committee. Although this is a very wide function of the committee, the Act does not provide for enabling of provisions as to how this would be implemented.
Each group of stakeholders has a different contractual arrangement with the company and distinct motives that means they will be more likely to push for decisions that benefit themselves first and foremost. Employees receive cash compensation plus benefits. By negotiating above-average compensation for workers, unions put the profitability of the company at risk. Many companies have gone bankrupt as a result of out-of-control labor costs. GM and Chrysler declared bankruptcy whereas Ford Motor Company managed to survive without bailout funds.
The four tiers of conflict of interest faced by board directors
Eventually, all three recovered by adjusting labor costs to be more or less in line with competitors, which they did by creating private trusts to finance the benefits of future retirees.
As a result of the financial difficulties that many companies encountered during the s and early s, some companies allowed labor unions to designate one or more members of the firm's board of directors.
The first major company in the United States to elect a union leader to its board was Chrysler in Board members representing unions have a delicate balancing act to play and they need to be aware of the potential conflicts of interest inherent in their role. On the one hand, if they push for high wage increases they could lead the company into bankruptcy and negatively affect all stakeholders in the long run.
On the other hand, if they agree to substantial wage reductions they could lose the trust of the workers they are supposed to defend and represent. Weak corporate governance could open the door for management to take excessive risks.
When the bonuses and incentives of top management are linked to quarterly earnings and profits, managers may be more inclined to focus on the short term, which sometimes leads to hazardous environmental and social impacts. Consumers and customers depend on companies for the reliable supply of products and services. When a company changes its pricing strategy, depending on the product it can potentially have serious repercussions on consumers.
For some patients, treatment became unbearably expensive, and hospitals were forced to use less-effective alternatives to limit costs.
In conflict situations, customers can hurt companies, and companies can harm the interests of customers. Closely involved stakeholders such as creditors, employees, top management or shareholders all have motives to push for decisions that benefit themselves but that may potentially hurt the interests of the company in the long run.
Conflicts of interest between different classes of stakeholders Conflicts can arise between the different classes of stakeholders, e.
Creditors, such as banks, play an important role in corporate governance systems. In some countries, they not only lend to firms but also hold equity so that they can have board representation. In the US, regulations prevent banks from dealing with debt-equity conflicts through equity ownership. An extreme example to illustrate this is that a company can borrow money, then sell all its assets to pay shareholders a liquidating dividend, leaving creditors with a worthless business.
Lou Gerstner had a record of fixing ailing companies and was credited with rescuing IBM through tough decision making, including massive layoffs. One major change took place inwhen IBM overhauled its pension plan under Gerstner to help cut costs, shocking long-term employees.
Even when executives proclaim that they are dedicated to the interests of shareholders, the fact that they try hard to minimize shareholder involvement in corporate governance shows that there is a conflict of interest between the two groups.
A majority of This Swiss referendum was one of the first social responses to the conflict of interest between executives and shareholders. The initiative was launched by businessman Thomas Minder, whose own story illustrated how entrenched executives could damage all other parties to benefit themselves. It suffered significant losses when Swissair went bankrupt in due to a failed expansion strategy.
Minder was so irritated that he started the anti-rip-off initiative. Could certain stakeholder groups, such as management, creditors, or shareholders benefit specifically from corporate decisions that could potentially hurt the other stakeholders?
This is apparent when the value increase for one class of stakeholders is directly linked to the value reduction of another class of stakeholders. Conflicts of interest within a group of stakeholders In closely held companies, large shareholders can exploit minority shareholders by leveraging their control power.
More often, directors are influenced by the controlling shareholder sitting on the board. Their directorship as shareholders, preference for capital structure, dividend policy, and investment strategy, or their position with regard to mergers and acquisitions might be in conflict with other shareholders. But during the shareholder showdown, Winterkorn won the support of the Porsche family, the labor leaders and the state of Lower Saxony.
However, before long Martin Winterkorn found himself having to resign amid the VW emissions scandal in September The Volkswagen case shows that it is difficult for a board to optimize the interests of shareholders when they have conflicting interests. In practice, when most directors on boards are shareholders or stakeholder representatives, infighting becomes a common issue.
Minority shareholders are vulnerable when the controlling owner attempts to squeeze out the other shareholders, for example by buying, selling or leasing assets at non-market prices, as a way to shift corporate resources to the large owner.
Conflicts within one group of stakeholders are not limited to shareholders. Creditors on boards could have an unfair advantage over other creditors in that they could use insider information to shield themselves from potential trouble and hurt other class of debt holders, especially when the firm is in financial distress.
The following is a checklist of tier-III conflicts of interest: Why is a key stakeholder group pushing for decisions that may benefit themselves but potentially hurt the interests of the company in the long run?
How can the pie be divided when there are conflicts of interest between the different classes of stakeholders, such as shareholders vs. How can conflicts of interest between subgroups of one particular stakeholder group be dealt with? How can a director make a wise decision when stakeholders have conflicting incentives and goals? The ethical behavior of executives has deep roots in Western ethical traditions.
An Overview On Stakeholder Relationship Committee - iPleaders
Discussions on business ethics have been ongoing since the market economy emerged more than years ago. In general, company and society are not in conflict: The well-being of society also depends upon profitable and responsible business enterprises. If not managed properly, maximizing returns for shareholders — for example by deceiving customers, defaulting on payments to creditors, squeezing suppliers and employees and evading taxes — can strip value generation from other stakeholders.
Indirect harmful effects on society include shaping the rules of the game e. Such behavior may well increase payoffs to shareholders in the short term but it can only lead to the eventual demise of the corporation and total destruction of long-term shareholder value.
The only class of stakeholders that benefits from this short-term value maximization exercise are chief executives enjoying high compensation, severance packages and golden parachutes.
When a CEO believes they could be dismissed at any time, they may be more inclined to take decisions that maximize their own income in the short term in the name of maximizing shareholder value.
If all CEOs behave in this manner and boards of directors allow it, companies will end up doing more harm than good to society. In a study of stewardship, companies potentially ranking highly in stewardship used a broad vocabulary to describe their relationships with other stakeholders in their 10K reports — words including air, carbon, child, children, climate, collaboration, communities, cooperation, CSR, culture, dialog, dialogue, ecological, economical, environment, families, science, stakeholder, transparency and well-being.
This mirrored their long-term approach to building rapport with local communities and the broader society. By comparison, companies potentially ranking low in terms of stewardship used words like appeal, arbitration, attorney, attorneys, claims, court, criticized, defendant, defendants, delinquencies, delinquency, denied, discharged, enforceability, jurisdiction, lawsuit, lawsuits, legislative, litigation, petition, petitions, plaintiff, punitive, rulings, settlement, settlements, and suit.
This indicates that companies rarely benefit from bad actions in the long run, as cost will come back to the company in the form of litigation, sanctions, fines or public humiliation.
The aftermath of the financial crisis demonstrated that greed does not pay. These fines were expected to deter further wrongdoing and to change corporate culture. Society and various stakeholders place their trust in board directors to run companies and they hold them accountable for doing so. Self-assessment questions to ponder with regard to this last dimension include: Why does your company exist? How does it create value? Is your company a contributor or a value-extractor in society?
Do you have the courage to take an ethical stand when your company is in conflict with society? Conclusions A company is the nexus that links the interests of each stakeholder group within its ecosystem. The board is the decision-making body and its successes and failures are determined by the ability of its board directors to understand and manage the interests of key stakeholder groups.
It is not an easy task to balance the interest of different stakeholders when shareholders are the ones who put money and often more visible and demanding. In principle, decisions at the board level should be ethical and reasonably balanced. Boards need to have a specific policy in place for dealing with tier-I conflicts of interest between individual directors and the company.
This policy needs to specify processes for dealing with major actual and potential conflicts, such as misappropriation of assets; insufficient effort, focus and dedication to board work; self-dealing and related transactions; insider trading; and taking advantage of corporate opportunities in an open and transparent way.
If possible, the policy should be signed by all directors and updated regularly, and conflicts of interest should be declared at each board meeting.
The control mechanisms could be institutionalized. Monitoring is based on several criteria, such as work attitude, behavior, capacity to fulfill duties, contribution, and so on. In addition, retiring and leaving directors, presidents and other senior management members have to undergo an auditing process by the board of supervisors. This type of institution is rarely seen in Western countries, so a similar and feasible solution is to allow external auditors to play a role here.
To deal with tier-II conflicts, directors need to disclose their relationship with stakeholders. This gives them an opportunity to declare in advance who they represent.
Even if the law requires all directors to represent the interests of the company, identifying their connections with specific stakeholder groups improves transparency and avoids the risk of conflicts of interest. In performing their duties, all directors need to put aside their ego, follow rules in discussions, respect others, and avoid toxic behavior in the boardroom.
Coalitions can be beneficial when they are aimed at acting in the best interest of the company, but they can be harmful when they are formed with the aim of dominating the board or benefitting a particular stakeholder group.
Wise decision making requires understanding deep-rooted conflicts between stakeholders and the company, between different stakeholder groups, and between subgroups of one stakeholder group. No company can survive without the input of each stakeholder group: Tier-IV conflicts between the company and society are philosophical.