Stakeholder Capitalism: A code for future-proofing governance

towards stakeholder capitalism
The members of the board and the board must always strive to enhance trust all round.

Stakeholder Capitalism: All the constructs of Stakeholder Capitalism came together at an extraordinary webinar recently. Mr. Pawan Kumar Vijay kicked it off by raising the spiritual quotient to a new high by quoting from the Rigveda. Anurag Goel gave the mantras of ‘niti’ and ‘niyat’. M Damodaran called for regulatory impact assessment and a principle-based approach to governance. Many fundamental questions were raised including the role of machine learning and artificial intelligence in law and regulatory evolution to make both relevant. The speakers also discussed the world’s transition from a focus on shareholder interest protection to Stakeholder Capitalism, giving a go by to Milton Friedman.

A view from Mars, looking at our Planet in 2030 was wonderfully presented by Anurag to bring home the impact of converging exponential technologies. He also brought out the concept of looking piercingly at the future.

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I take the view that the need of the hour is to work with the existing, vibrant and evolving law and turn it into a force for the future that will unfold hereafter. Here is a revised CODE:

Code for all directors — Schedule IV, Section 149(8)

Towards stakeholder capitalism: The Code is a guide to professional conduct for all directors. Adherence to these standards and fulfilment of their responsibilities in a professional and faithful manner will promote confidence of the entire stakeholder community, regulators and law makers in the institution of directors.

Guidelines of professional conduct:

Every director shall:

  1. practice purity of thought and action;
  2. act objectively, responsibly and constructively;
  3. exercise responsibilities in a bona fide manner in the interest of the company;
  4. devote enough time and attention to facilitate balanced decision making;
  5. not allow personal interest to cloud judgment in the paramount interest of the company, insist on data that is trustworthy and shall be courageous in decision making;
  6. not abuse position to the detriment of the company or its shareholders;
  7. refrain from any action that would lead to loss of independence;
  8. where conflicts arise, the director must immediately inform the Board accordingly;
  9. assist the company in implementing the best corporate governance practices.

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Role and functions:

The directors shall:

  1. help challenge and sharpen strategy, embed ESG and the UN’s Sustainable Development Goals, ensure objective performance measurement, manage risk and opportunities, oversee allocation of resources, ensure key appointments are made objectively and policies/standards of conductance implemented faithfully;
  2. bring an objective view in the evaluation of the performance of board and management;
  3. scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance on six capitals: natural, human, social and relationships, intellectual, financial and physical;
  4. satisfy themselves on the block chaining of information and controls so that risk management is robust and defensible;
  5. safeguard the interests of all stakeholders, particularly the minority shareholders;
  6. balance the conflicting interest of stakeholders;
  7. determine appropriate levels of remuneration of executive directors, key managerial personnel and senior management and have a prime role in appointing and where necessary recommend removal of executive directors, key managerial personnel and senior management;
  8. moderate and arbitrate in the interest of the company, in situations of conflict between management and shareholder’s interest.

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Duties of the Board:

All directors shall—

  1. undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity with the company;
  2. seek appropriate clarification or amplification of information and, where necessary, take and follow appropriate professional advice and opinion of outside experts at the expense of the company;
  3. strive to attend all meetings of the Board of Directors and of the Board committees of which they are members;
  4. participate constructively and actively in the committees of the Board in which they are chairpersons or members;
  5. strive to attend the general meetings of the company;
  6. where they have concerns about the running of the company or a proposed action, ensure that these are addressed by the Board and, to the extent that they are not resolved, insist that their concerns are recorded in the minutes of the Board/committee meeting;
  7. keep themselves well informed about the business model of the company and the external competitive environment in which it operates;
  8. not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board;
  9. pay enough attention and ensure that adequate deliberations are held before approving related party transactions and assure themselves that the same are in the interest of the company;
  10. ascertain and ensure that the company has an adequate and functional vigil mechanism and to ensure that the interests of a person who uses such mechanism are not prejudicially affected on account of such use;
  11. report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy;
  12. assist in protecting the company from disruption by competitors, shareholders or its employees;
  13. not disclose confidential information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by the Board or required by law.

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Manner of appointment:

  1. Appointment process of directors shall be independent of the company management. The Board shall ensure that there is objective selection of all directors with appropriate balance of inclusion, gender equality, diversity, skills, experience and knowledge in the Board. This will enable the Board to discharge its functions and duties effectively.
  2. The appointment of director(s) of the company shall be approved at the meeting of the shareholders.
  3. The explanatory statement attached to the notice of the meeting for approving the appointment of directors shall include a statement that in the opinion of the Board, the director proposed to be appointed fulfils the conditions specified in the Act and the rules made thereunder and that the proposed director is independent of management.
  4. The appointment of directors shall be formalised through a letter of appointment, which shall set out:
  • (a) the term of appointment;
  • (b) the expectation of the Board from the appointed director; the Board-level committee(s) in which the director is expected to serve and its tasks;
  • (c) the fiduciary duties that come with such an appointment along with accompanying liabilities;
  • (d) provision for Directors and Officers (D and O) insurance, if any;
  • (e) the Code of Business Ethics that the company expects its directors and employees to follow;
  • (f) the list of actions that a director should not do while functioning as such in the company; and
  • (g) the remuneration, mentioning periodic fees/remuneration, reimbursement of expenses for participation in the Boards and other meetings and profit related commission, if any.

5. The terms and conditions of appointment of directors shall be open for inspection at the registered office of the company by any member during normal business hours.

6. The terms and conditions of appointment of directors shall also be posted on the company’s website.

Re-appointment of directors:

The re-appointment of directors shall be based on report of performance evaluation.

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Resignation or removal:

  1. The resignation or removal of any director shall be in the manner provided in sections 168 and 169 of the Act.
  2. Any director who resigns or is removed from the Board of the company shall be replaced by a new director within 2[“three months”] from the date of such resignation or removal.
  3. Where the company fulfils the requirement of independent directors in its Board even without filling the vacancy created by such resignation or removal the requirement of replacement by a new independent director shall not apply.

Separate meetings:

  1. The independent directors of the company shall hold at least two meetings in a financial year, without the attendance of non-independent directors and members of management;
  2. All the independent directors of the company shall strive to be present at such meeting;
  3. The meeting shall:
  • a. review the performance of non-independent directors and the Board as a whole;
  • b. review the performance of the Chairperson of the company, considering the views of executive directors and non-executive directors;
  • c. assess the quality, quantity and timeliness of flow of information between the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties.

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Evaluation mechanism:

  1. The performance evaluation of independent directors shall be done by the entire Board of Directors, excluding the director being evaluated.
  2. Based on the report of performance evaluation, it shall be determined whether to extend or continue the term of appointment of the independent director.
  3. All provisions shall apply in the case of a Government company as defined under clause (45) of section 2 of the Companies Act,2013.

Making companies score high on ESG, establishing the highest quality of cyber security and enterprise risk and opportunity management, and making the company reach escape velocity and exponential growth are the critical duties of a futureproof Board. The members of the board and the board must always strive to enhance trust all round.

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Shailesh Haribhakti is a Chartered and Cost Accountant, an internal auditor and a certified financial planner. He is a board chairman, audit committee chair and independent director at some of the country's most preeminent organisations. He is a thought leader on the Indian economy and public policy.