IS CORPORATE GOVERNANCE THE ANSWER TO

CORPORATE STRUCTURAL FAILURE?
Indrajit Dube ∗

Corporate Governance approaches are mainly agency centric. The

problem in present corporate governance discussion is its narrower
approach towards large listed public limited companies only. Structural
problems of large listed companies are largely different from moderate and
small size companies or smaller incorporated business forms in different
jurisdictions. Further, structural problem is not merely confined to
shareholder control but it goes beyond.
What is the ambit of corporate governance or to what extent
stakeholders have role to play (e.g. product market and not only capital
market) in corporate governance? Does enlighten shareholders value in
UK or constituency statutes in the US or “enlighten stakeholder initiative”
in India (the phrase is coined by the author based on the revival of
“Saytam”— a software giant.) take corporate governance to the next level?
The author will search the answers in the proposed paper.

INTRODUCTION

The thoughts on corporate governance should reposition from Board of

Director centric (mainly agency problem centric) to stakeholder centric
approach. It is well said that activities of Board of Directors is highly
influenced by socio-culture issues within which it operates. More often,
their activities are influenced by factors beyond their professional training
and upbringing. So, discussion on agency problems; board ethical values;
introduction of more professionalism and strengthening the role of
independent director have its inherent limitations to take corporate
governance to the next level. According to the author, a major problem of
corporate functioning emerges, not out of “agency problem”, but structural
problem in the domestic corporate law.
Part I of the paper discusses about influences of corporate on modern
life and how the decision of the board impacts on it. So, the discussion of
corporate governance was how to bring efficiency into the system by means
of disclosure and transference and made the board more accountable for its
action. Underlying thrust was to make the board more reasonable in its
decision making and actions so that it ultimately impacts on well being of
all. Part II traces back the different models of corporate governance
                                                                                                               
∗
 Asst. Professor, Rajiv Gandhi School of Intellectual Property Law, Indian Institute of Technology,
Kharagpur.

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developed in different jurisdictions. In an analysis, it was found that

shareholder centric approaches brought more efficiency instead of
stakeholder or state-oriented models. Problem in both the models was the
balancing of multi-party interest which ultimately bore upon efficiency of
corporate function. Part III attempts to propose the sustainable model of
corporate governance which may be adopted by any type of business
enterprise and give stress on further enhancement of functional efficiency
and adoption of sustainable business practice.

I. BACKGROUND THOUGHTS

A. Opening Remarks

What ought to be the objective of Corporate Governance - mitigating

the agency problem or striving towards sustainable model of business?1 This
question became relevant for globalization of the economy, flow of capital a
cross the boundary, removal of trade barrier, fading the role of Government
vs. Private in civic, massive private participations, infrastructure & utility
services, trans-boundary impact of corporate failure etc. Influence of local
elements on the market is gradually fading away. Largely the market is
moving towards unified pattern or convergence2. Impacts of that are being
significantly felt on every strata of life; quick reference to these may be
made to Lehman Brothers Holding Inc. whose filing of bankruptcy affected
far flung soil or Satyam Computer Services Ltd. in India, wherein disclosure
of financial irregularities affected many business houses around the globe.
All these incidents equally created pressure on every one irrespective of
their relation vis-à-vis company. Debate on issues regarding shareholders
control over the management, tussle of distribution of power, managerial
remunerations vis-à-vis performance and corporate failure may be held back
for time being. But the discussion of corporate governance should be in
larger perspective which would in turn foster the sustainable business
model. Furthermore, the majority of agency problem centric corporate
governance principle failed to address the sustainable model of corporate
governance. Sustainable model of corporate governance should be based on
stakeholder centric approach of corporate governance, which will act

                                                                                                               
1
See generally, Lucian Arye Bebchuk & Mark J. Roe, A theory path dependence in corporate
ownership and governance, convergence and persistence in corporate governance, edited by Jeffery
N. Gordon and Mark J. Roe, Cambridge, 2004
2
id

  2  
  

owards long-term cash flow3. Again these issues of corporate governance

have to be backed by political process followed by changes in the hard law.4
Traditionally, corporate governance has evolved around the contract
theory and agency problem based on separation of ownership and
management. So, all standard texts, review and research papers and
business committee reports base their arguments around agency problem
only. The company/corporate law across the jurisdictions laid down the
basic governing relation between owner and managers, whereas other
relations like moral and beneficiary, economic and succession were left to
mutual understanding between owners and managers. So, the objective of
theory building was to strengthen the protection of interests of shareholders
and other stakeholders against the management supremacy.
Over the years, theoretical boundaries of the corporate governance
have expanded on the issues like relationship management between the
different constituents of corporate. So, the objective of corporate
governance not only laid the protection of interest of shareholders but
towards economic and social prosperity.

B. Board in the Center of Corporate Activities

Major literatures till today on corporate governance carry forward

discussion only on board structure, power and function and more precisely
the agency problem. In all leading jurisdictions, board in present corporate
structure is the principal organ. The managerial power of the company is
vested in the board and for that matter all powers of the company except
those, which are especially reserved with the general meeting by the Act or
the Article of the Association or any other relevant Instrument. So, the
power of the board is equal to power of the company. The company is
entitled to the benefit of collective wisdom of board of directors. And the
board is collectively responsible to the company5.

                                                                                                               
3
See, Margaret M. Blair and Lynn A. Stout, A Team Production Theory of Corporate Law, 2
Verginia Law review 88, p. 287
4
See generally, Henry Hansmann & Reinier Kraakman, The End of History for Corporate Law, 89
Georgetown Law Journal 439-68 (2001) reprinted in Jeffrey Gordon and Mark Roe, eds.,
Convergence and Persistence in Corporate Governance, Cambridge, 2004
5
“Clark summarizes the law on the question as follows: (1) corporate officers like the president and
treasurer are agents of the corporation itself;(2) the board of directors is the ultimate decision-making
body of the corporation (and in a sense is the group most appropriately identified with "the
corporation"); (3) directors are not agents of the corporation but are sui generis; (4) neither officers
nor directors are agents of the stockholders but (5) both officers and directors are "fiduciaries" with
respect to the corporation and its stockholders.” Robert C. Clark, Agency Costs Versus Fiduciary
Duties, in Principle and Agents: The Structure of Business 55 (John W. Pratt & Richard J. Zeckhauser
eds. 1985) P. 56

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Corporate is always identified as favored vehicle in a business

transaction because of its efficiency in attracting large pool of funds while
minimizing the risk of individual investor. Efficiency in attracting huge
fund and deploying the same in a business helped corporate in generating
huge funds. Sometime the corpus of these companies or group of companies
is even higher than the State exchequer. Any decision taken by the board of
a large company relating to its own financial matter, in many occasion, has a
necessary impact on economic governance of the state6. Economy stability
of the states, in present day, depends largely on these corporations. The
capital and wealth of these companies is largely under the control of board
of directors which give them huge economy power, and in turn affect the
social economy and political system of the country.7
These giant companies are integral part of modern societies. Possibly
every individual must come in contact with them almost constantly and
possibly with their birth in the world. An individual may be employed by
any company or continuously accepting their service. Take for example the
house he/she is staying or the transport which he/she is using, electricity and
the electrical appliance he/she using or to basic necessities which he/she is
collecting from the markets/ supermarkets manufactured, distributed and
sold by the companies only 8 . In many cases these corporations also
discharge essential functions of the state, for example, distribution of
essential commodities, medical facilities, building and maintenance of
infrastructure, roads etc. Policy of the company’s business is regulated by
“board of directors”, so, decision of board might affect life of millions of
people9.
It is clear from above annotation that the activities of board related to
company not only have an impact over people connected with the company
but it leaves its impact on the present day life of the people, one or other
way. So, in present corporatized world, board is required to be more
responsible and accountable for their actions. Legally, “rule of law” means
adoption of the governance in terms of just, fair and accountable manner,
not only to the shareholders but to larger stakeholders.
To achieve this goal ORGANISATION FOR ECONOMIC CO-OPERATION
AND DEVELOPMENT OECD has proposed certain criteria regarding the
functioning of board in “principles of corporate governance”. These are
quite pertinent to refer here.
                                                                                                               
6
See general, Robert L. Knauss, Corporate Governance: A Moving Target, 79 Mich. L. Rev. 478
(1981)
7
See, Indrajit Dube, Corporate Governance, Lexis Nexis Butterworth, New Delhi 2009
8
See, Berle, Adlof A. & Means, Gradiner C., The Modern Corporation and Private Property, The
Macmillian Company, New York 1962 pp. 24 - 39
9
Indrajit Dube, Supra note 8

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10
“… [T]he board is chiefly responsible for monitoring managerial
performance and achieving an adequate return for shareholders, while
preventing conflicts of interest and balancing competing demands on the
corporation. In order for boards to effectively fulfill their responsibilities
they must have some degree of independence from management. Another
important board responsibility is to implement systems designed to ensure
that the corporation obeys applicable laws, including tax, competition,
labour, environmental, equal opportunity, health and safety laws. In
addition, boards are expected to take due regard of, and deal fairly with,
other stakeholder interests including those of employees, creditors,
customers, suppliers and local communities. Observance of environmental
and social standards is relevant in this context.
A. Board members should act on a fully informed basis, in
good faith, with due diligence and care, and in the best interest of the
company and the shareholders.
In some countries, the board is legally required to act in the interest of
the company, taking into account the interests of shareholders, employees,
and the public good. Acting in the best interest of the company should not
permit management to become entrenched.
B. Where board decisions may affect different shareholder
groups differently, the board should treat all shareholders fairly.
C. The board should ensure compliance with applicable law and
take into account the interests of stakeholders.
D.The board should fulfill certain key functions, including:
1. Reviewing and guiding corporate strategy, major
plans of action, risk policy, annual budgets and business
plans; setting performance objectives; monitoring
implementation and corporate performance; and overseeing
major capital expenditures, acquisitions and divestitures.
2. Selecting, compensating, monitoring and, when
necessary, replacing key executives and overseeing
succession planning.
3. Reviewing key executive and board remuneration,
and ensuring a formal and transparent board nomination
process.
4. Monitoring and managing potential conflicts of
interest of management, board members and shareholders,
including misuse of corporate assets and abuse in related
party transactions.
                                                                                                               
10  OECD Principles of Corporate Governance, at Ministerial level held on 27-28 April 1998, p. 54  

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5. Ensuring the integrity of the corporation’s accounting

and financial reporting systems, including the independent
audit, and that appropriate systems of control are in place, in
particular, systems for monitoring risk, financial control, and
compliance with the law.
6. Monitoring the effectiveness of the governance
practices under which it operates and making changes as
needed.
7. Overseeing the process of disclosure and
communications.
The specific functions of board members may differ according to the
articles of company law in each jurisdiction and according to the statutes of
each company. The above-noted elements are, however, considered
essential for purposes of corporate governance.
E. The board should be able to exercise objective judgement on
corporate affairs independent, in particular, from management.
…
Independent board members can contribute significantly to the
decision-making of the board. They can bring an objective view to the
evaluation of the performance of the board and management. In addition,
they can play an important role in areas where the interests of management,
the company and shareholders may diverge such as executive remuneration,
succession planning, changes of corporate control, take-over defences, large
acquisitions and the audit function.
The Chairman as the head of the board can play a central role in
ensuring the effective governance of the enterprise and is responsible for the
board’s effective function. The Chairman may in some countries, be
supported by the company secretary. In unitary board systems, the
separation of the roles of the Chief Executive and Chairman is often
proposed as a method of ensuring an appropriate balance of power,
increasing accountability and increasing the capacity of the board for
independent decision making.
1. Boards should consider assigning a sufficient number
of non-executive board members capable of exercising
independent judgement to tasks where there is a potential for
conflict of interest. Examples of such key responsibilities are
financial reporting, nomination and executive and board
remuneration.
While the responsibility for financial reporting, remuneration and
nomination are those of the board as a whole, independent non-executive
board members can provide additional assurance to market participants that

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their interests are defended. Boards may also consider establishing specific
committees to consider questions where there is a potential for conflict of
interest. These committees may require a minimum number or be composed
entirely of non-executive members.
2. Board members should devote sufficient time to their
responsibilities.
It is widely held that service on too many boards can interfere with the
performance of board members. Companies may wish to consider whether
excessive board service interferes with board performance. Some countries
have limited the number of board positions that can be held. Specific
limitations may be less important than ensuring that members of the board
enjoy legitimacy and confidence in the eyes of shareholders.
In order to improve board practices and the performance of its
members, some companies have found it useful to engage in training and
voluntary self-evaluation that meets the needs of the individual company.
This might include that board members acquire appropriate skills upon
appointment, and thereafter remain abreast of relevant new laws,
regulations, and changing commercial risks.
F. In order to fulfill their responsibilities, board members
should have access to accurate, relevant and timely information.
Board members require relevant information on a timely basis in order
to support their decision-making. Non-executive board members do not
typically have the same access to information as key managers within the
company. The contributions of non-executive board members to the
company can be enhanced by providing access to certain key managers
within the company such as, for example, the company secretary and the
internal auditor, and recourse to independent external advice at the expense
of the company. In order to fulfill their responsibilities, board members
should ensure that they obtain accurate, relevant and timely information”11.
It has been experienced from the functioning of Corporate that there is
a direct relationship between the board composition and its functional
efficiency. Different legal systems in the world predominantly adhere to
unitary board structure while some of them voted for two tier board system.
From perspective of functional efficiency, different committees on corporate
governance indicate the following:
a. Boards of directors of most large publicly owned
corporations typically range in size from 8 to 16 individuals.
Optimal board size will vary from corporation to corporation and

                                                                                                               
11
see, Supra note 10 pp 54 - 66

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industry to industry. Smaller boards are often more cohesive and

work more effectively than larger boards.
b. It is important for the board of a large publicly owned
corporation to have a substantial degree of independence from
management. Accordingly, a substantial majority of the directors of
such a corporation should be outside (non-management) directors.
The degree of independence of an outside director may be affected
by many factors, including the personal stature of the director and
any business relationship of the director with the corporation or any
business or personal relationship of the director with management.
This would involve consideration of whether the relationships are
sufficiently significant as to interfere with the director’s exercise of
independent judgment. If a particular director is not deemed
sufficiently independent, the board may nevertheless conclude that
the individual’s role on the board remains highly desirable (as in the
case of an inside director) in the context of a board composed of a
majority of directors with the requisite independence.
c. For certain functions, such as membership on an audit or
compensation committee, more specific standards of independence
should be used.
d. Inside directors will ordinarily include the chief executive
officer and may also include other officers whose positions or
potential for succession make it appropriate, in the judgment of the
board, for them to sit on the board.
e. Term limit regarding appointment of board of director may
affect the effective function of the board as prescribed by certain
jurisdictions. Such limits often cause the loss of directors who have
gained valuable knowledge concerning the company and its
operations and whose tenure over time has given them an important
perspective on long-term strategies and initiatives of the corporation.
So, enabling law, rules from Market regulator and by-laws of SROs’
should ensure the same.
Now the question is that if all has been ensured then will the corporate
move toward sustainable business practice! Answer possibly is not in
affirmatives today, though would have been affirmative till few years back.
Satyam win the ‘Golden Peacock Award’ for best corporate governance
practices and within few months, the biggest financial irregularity was
unveiled.

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II. ALTERNATE MODELS

A. Three Alternate of Model Against Classical Model

Hansmann & Kraakman, have setup three rivals that competed with the
classical Shareholder model12 i.e the managerial oriented model, the labour
oriented model and the state oriented model.
The manager oriented model, associated with the United States in the
1950s and 1960s, was based on the view that “professional corporate
manager could serve as disinterested technocratic fiduciaries who will
guide business corporation to perform in a ways and that would serve the
general public interest”. They claim that this model of social benevolence
collapses into Self-serving managerialism, in which managers end up
serving their own interest with significant costs from resource misallocation.
These costs imperil the competitiveness of the model and thus account for
its replacement policyholder - driven model in United States 13 . “The
normative appeal of this view arguably provided part of the rationale for the
various legal development in US law in the 1950s and 1960s the trend to
reinforce the discretionary authority of corporate managers, such as proxy
rules promulgated by security exchange commission and Williams Act.”14
The labor-oriented model, exemplified most explicitly by German
codetermination but manifested in other nations, has governance structures
amplifying labourer’s voice.
“Large-scale enterprise clearly present problems of labour contracting.
Simply contract, and the basic doctrine of contract law, are inadequate in
themselves to cobble and the long relationships between workers and the
firms that employ them - relationship that may be afflicted by, among other
things, substantial transactions, investments and asymmetry of information.
Collective bargaining by organized unions has been one approach to
these problems - an approach that lies outside the corporate law, since it is
not dependent on the organizational structure of the firms with which the
employees bargain. Another approach has been to involve employees
directly in corporate governance by, for example, providing the employee
representation on the firms board of directors. Although serious attention
                                                                                                               
12
Lucian Arye Bebchuk & Mark J. Roe, Supra note. 1, “The five basic characteristics of the
corporate from provided, by their nature, for a firm that is strongly responsive to the shareholder
interest. They do not, however, necessarily dictate how the interest of other participants in the farm -
such as employees, creditors, other suppliers, costumers, or society at large - will be accommodated.
Nor do they dictate the way in which conflicts of interest among shareholders themselves - and
particularly between the controlling and non-controlling shareholders - will be resolved. Throughout
most of 20th-century there has been debate over these issues, and experimentation with alternative
approaches to them.”
13
Margaret M. Blair and Lynn A. Stout, Supra note 3
14
Margaret M. Blair and Lynn A. Stout, Supra note 3

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was given to the employee participation in Germany as only as Weimar

Republic unionism was the dominant approach everywhere until World
War II. Then, after the war, serious experimentation with the employee
participation in corporate governance began in Europe. The result of this
exceptions are most conspicuous in Germany, … employees are entitled to
elect half of the members of the ( upper-tier) board of director in all large
German firms.”15
Such mechanisms are likely to be insufficient and disruptive because of
the heterogeneity of interest among employees themselves and between
employees and shareholders. Hence, such farms will lose out in competitive
product market. Contractual or Labour regulatory solutions are superior
means of labour influences, because they avoid the diversion of authority
and interest within the firm.
“Both before and after World War II, dear was widespread support for
a corporatist system in which the government would play a strong direct
role in the air fears of large business firms to provide some assurance that
private enterprise would have served the public interest. Technocratic
governmental bureaucrats, the theory went, would help to avoid the
deficiencies of the market through the direct exercise of influence in
corporate affairs. … The principal instruments of state control over
corporate affairs in corporatist economy have generally lain outside of
corporate law. The include, for example, such transient this creation in the
hand of government bureaucrats or what the allocation of credit, foreign
exchange, licences, and exceptions from anti-competition rules.
Nevertheless, corporate law also played a role, for example, weakening seal
holder control or what corporate managers… and employing state
administer criminal sanctions rather than shareholder-controlled civil
lawsuits as the principal sanction for managerial malfeasance … .”16
These state oriented models, associated particularly with France, Japan
and India, entail large state role in corporate affairs, either through
ownership or close bureaucratic engagement with the firm’s manager, to
guide private enterprise in the political elites view of public interest. The
turn away of socialism and the recent performance of economies organized
on corporatize lines have discredited this model.

B. Neo Attempts based on Broad Stakeholder Approach

1. Constituency Statutes

                                                                                                               
15
Margaret M. Blair and Lynn A. Stout, Supra note 3
16
Margaret M. Blair and Lynn A. Stout, Supra note 3 p. 40

  10  
  

Prof. Lawrence Mitchell expressed following opinion regarding the

constituency statutes. “The increasing recognition of the modern
corporation’s profound effect on the lives of a variety of groups not
traditionally within the corporate law structure has the potential to lead
corporate law into the next century in a manner more reflective of the role
that this type or organization actually plays in our society”.17
The business round table of America also endorses the importance of
constituency statutes,
“Corporations are chartered to serve both their shareholders and society
as a whole. The interests of the shareholders are primarily measured in
terms of economic return over time. The interests of other in society (other
stakeholders) are defined by their relationships to the corporations. The
other stakeholders in the corporations are its employees, customers,
suppliers, creditors, the communities where the corporation does business,
and society as a whole.”18
The constituency statutes were developed in America to give
appropriate protection to stakeholders at the time of takeover because
adequate safeguard was unavailable within corporate statute. These statutes
give appropriate authority to board to recognize the interest and give
protection to their interest at the time of take over.
This model has recognized the importance and role of stakeholders in
larger social perspective in the context of corporate functioning but suffered
from limited objective of corporate governance.

2. Stakeholder Model

The team production theory advocates that the corporation is a

collective effort. First, of all these shareholders collectively contribute in the
capital of the company; Secondly, the management makes the policy and
run the business; Third, the employees contribute to the human capital;
Fourth, the creditors and suppliers arrange for the necessary resources for
the organizational function; Fifth, the consumers are the end recipients of
the corporate processes. So, the protection of all the stakeholders is the
primary focus for corporate law and governance.
In process of theorization, stakeholder model has developed two
distinct approaches, i.e. fiduciary stakeholder model approach and
                                                                                                               
17
Lawrence E. Mitchell, A theoretical and practical framework for Enforcing Corporate Constituency
statues, 70 Tex. L. Rev 579 (1992); See also, Gary Von Stange, Corporate Social Responsibility
Through Constituency Statutes: Legend or Lie? 11 Hofstra lab L J 461; Roberta Romano, What Is the
Value of Other Constituency Statutes to Shareholders? 43 U. Toronto L.J. 533 (1993); Bayless
Manning, Thinking Straight about Corporate Law Reform, Vol. 41 Law & Contemp. Probs. 3 (1977)
18
The business Roundtable, Corporate Governance and American Competitiveness, 46 Bus. Law 241

  11  
  

representative stakeholder model 19 . In the previous model it has been

presumed that the board of directors will function as a neutral coordinator of
                                                                                                               
19
Robert C. Clark, Supra note 5 p. 41; see also, Amy J. Hillman and Gerald D. Keim, Shareholder
Value, Stakeholder Management and Social issues: What’s the Bottom Line? 22 Strategic
management Journal 2 (2001) “… [t]he economic success of the firms raises social expectations to
consider more that the interests of the primary stakeholders when making resource decisions, can
firms respond to these social issues and continue to be economically viable?”; see further, R Edward
Freeman, Andrew C. Wicks, Bidhan Paemar, Stakeholder Theory and “The Corporate Objective
Revisited” 15 organization Science 3 (2004) ‘Stakeholder theory began with the assumption that
values are necessarily and explicitly a part of doing business, and rejects the separation thesis.’ ‘Many
of the firm s have develop and run the business in terms highly consistent with stakeholder theory.
Firms such as J&J, ebay, google, Lincoln Electric, AES and the companies featured in Built to Last
and Good to Great provide compelling examples how manager understand the core insight of
Stakeholder theory and use them to create outstanding business.’ The question of moral
responsibility is critical because in order to establish the legitimacy of stakeholder concerns in the
internal governance of the corporation, we first must determine whether the corporation has an
obligation to these stakeholder groups. By this I do not mean, of course, a legal obligation, for the
answer given by contemporary legal doctrine is rather clear: it has none. What I do mean is obligation
in the ethical or moral sense, in light of the fact that corporations can and do affect the interests of
these other constituents. The traditional denial of legal obligation is based upon the ethic of self-
reliance, which essentially has been refined to the policy of economic efficiency. In other words, legal
decision-makers have treated nonstockholder constituents as able to protect themselves against
corporate externalities created in the pursuit of stockholder profit through the contracting process and,
when it fails (as in the case of environmental externalities, for example), through legislation aimed
not at the corporate governance process, but at conduct external to it. In the areas of creditors' and
employees' rights, which have received the greatest legal attention, the claiming stakeholders are
blamed for their own failure to protect themselves. The blame is premised both on the notion that they
are able to do so and the belief, noted by Professor Green, that efficient corporate operations will
suffer if directors are made to divide their loyalties among potentially competing corporate groups.

Lawrence E. Mitchell, Ground work of the Metaphysics of Corporate Law, Washington and Lee Law
Review, (Fall 1993) 1477, pp. 1479-80, ‘The question of whether non-stockholder constituents are
able to protect themselves is very real and important. Certainly some of these groups do have some
opportunity to decide whether or not to deal with a particular corporation and to have some influence
upon the terms. Other stakeholder groups, like the broader communities in which the corporations
operate, and those asserting environmental interests, have little if any chance to affect their
relationship with the corporation, except possibly through the attenuated legislative process. Even
those groups that can arguably protect themselves may be able to do so by avoiding a particular
corporation--but clearly they cannot avoid dealing with corporations generally. And the bargaining
power they have in this respect is sorely limited. A particular union or group of employees bargains
with individual corporations, but corporations as an entire category of institution are united by the
stockholder profit motive. Thus their power and incentives are backed by the mandate of law,
whereas the stakeholder groups are left to exert what private power they may have in individual cases.
In other words, the law privileges corporations as a class to behave differently than do natural persons
or even other institutions--it privileges them to externalize the costs of stock-holder profit
maximization on others, and to defend this externalization on the basis of the legal mandate to
maximize stockholder profits.

Perhaps more importantly, once the stakeholder has entered into a contractual relationship, if any,
with the corporation, it loses all control over the conduct of that relationship outside of the contract
terms.And the contract terms in any relational contract will necessarily be incomplete. Nor can these
groups look to contract doctrine to protect them, because in cases in which the meaning of the only
nontextual remedy, the implied covenant of good faith, has been applied, courts have defined and

  12  
  

the contributors and returns of all stakeholders in the firm. Under this
model, stakeholders other than investors are not given the direct
representations on the corporate board. Rather, these other stakeholders are
to be protected by relaxing the board’s duty or incentive to represent only
the interests of stakeholders, thus giving the board greater discretion to look
after stakeholders’ interest.
Other Stakeholder model substitutes direct shareholders representatives
for fiduciary directors. In this model, two or more stakeholder constituency
appoint representatives to the board of directors, who then elaborate policies
that maximize the joint welfare of all stakeholders, subject to the bargaining
leverage that each group brings to the boardroom table. In the model, board
act like a collective fiduciary, even though the individual members remain
champion representative of respective stakeholders. The board here
functions as forum for resolving specific interests of different stakeholder
groups. But neither models have proposed any new approaches. These
models are the close variant of manager – oriented model or labor oriented
model. As this model somewhere replicates the previous models in respect
of the underline thoughts, it has the same shortcomings.

3. Enlighten Shareholder Value

Prof. Paul L Davies remarked “the directors must take into account
‘any need of the company’ to have regard to the interests of its employees;
business relationships with suppliers, customers and others; the impact of its
operations on the community and the environment; and to maintain a
reputation for high standards of business conduct. As far as directors’ duties
are concerned, this is the heart of the Enlighten Shareholder Value [ESV]
approach. The aim is to make it clear that although shareholder interests are
predominant (promotion of the success of the company for the benefit of its
members), the promotion of shareholder interests does not require riding
roughshod over the interests of other groups upon whose activities the
business of the company is dependent for its success. In fact, the promotion
of the interests of the shareholders will normally require the interests of
other groups of people to be fostered. The interests of non- shareholder
groups thus need to be considered by the directors, but, of course, in this
shareholder-centred approach, only to the extent that the protection of those
other interests promotes the interests of the shareholders. The statutory
formulation can be said to express the insight that the shareholders are not
                                                                                                                                                                                                                                                                                         
limited it by the motive of stockholder profit and by narrow reference to the necessarily limited
contractual terms. Thus the corporation's directors can assume a monopoly of power, and the self-
protective ability of even contracting stakeholders is dramatically diminished if not entirely lost.”

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likely to do well out of a company whose workforce is constantly on strike,

whose customers don’t like its products and whose suppliers would rather
deal with its competitors. Nor is this insight necessarily new. In a related
context Bowen L J said in the that the ‘law does not say that there are to be
no cakes and ale, but there are to be no cakes and ale except such as are
required for the benefit of the company.’ (Hutton v West Cork Ry) The main
difference with new statutory formulation is that Bowen L J was probably
identifying a discretion to take into account non-shareholder interests, whilst
the Bill creates a duty to do so.
Thus, there is no doubt that the CLR’s formulation of the basic
objective of directors’ duties is towards the shareholder, rather than the
stakeholder, end of the spectrum. In my view, going more widely than this
simply produces a formula which is unenforceable and paradoxically thus
gives management more freedom of action than they previously had. A
wider formulation, it is true, might work if there was extensive
reconstruction of the composition of the board so as to reflect stakeholder
interests, but no jurisdiction, not even Germany, which of course represents
only one stakeholder interest on the board, the employees, has ever sought
to turn the board into a sort of representative Parliament of all those
potentially affected by the company’s actions – and I would suggest it is for
good reasons in terms of effective decision-making that such restraint has
been shown.”20
This Model advocates somewhat similar principles of Management –
Oriented Model.

III. PROPOSED SUSTAINABLE MODEL OF CORPORATE GOVERNANCE

Sustainable Model of Corporate Governance

Keeping in mind the above models, the author recommends the

“Sustainable model of Corporate Governance” to suit any type of business
organizations. Constituent of sustainable model may be
• Prepare and Publish ‘Mission Statement’ of Enterprises
• Enterprise Policy Statement to Manage Business Growth
• Enterprise Succession Plan
• Annual Management and Accomplishment Statements
• Stakeholder relations and welfare undertaken by the enterprise
                                                                                                               
20
Paul L Davies, Enlightened Shareholder Value and the New Responsibilities of Director, Lecture
Delivered at the University of Melbourne Law School, 4 Oct. 2005,
http://cclsr.law.unimelb.edu.au/files/Enlightened_Shareholder_Value_and_the_New_Responsibilities
_of_Directors[1].pdf last visited feb3 2011

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• Legal and regulatory Compliances

Mission Statement of Enterprises

The mission statement of the enterprise is the simple statement of
objective of business and purpose, which is a public statement about the
organization mission and commitment to its stakeholders. Such public
statement asserts that the enterprise actually engages in activities that will
benefit the stakeholders.
In informal organizations as well as the small private and public
companies, the organizational mission is not usually specified and work is
more on ad hoc arrangement. So, it is difficult for any outsider [internal and
external stakeholder] to contemplate its future course of actions. The
mission statement will be an organizational objective statement in public
domain which will deter the organization from taking ad hoc future course
of action relating to organizational future development and stakeholder
management. Further, it will also provide the policy regarding stakeholder
management.
The author believes that this should be a voluntary action on the part of
the organization, whereby no regulatory monitoring is required. On the
other hand, the mission statement will bring manifold credibility of the
organization before public life. So, the organization should adopt the
appropriate means, either in electronic mode or physical, to publish the
same. If the organization is undergoing modification, both the mission
statements should be published simultaneously for coming six months.

Enterprise Policy Statement to Manage Business Growth

The manager and proprietor of the enterprises should give annual
policy statement about the business growth from the perspectives of capital
deployment, management, productions/business, consolidation of the
organizational structure, human resource management, business risks it
would be subjected to and stakeholder relations relating to above issues [like
regulator, creditor and supplier relationship with the enterprise]. The
statement should also include enterprises proposed growth in coming year
[within one month of the financial year beginning] and the time line within
which it wants to achieve that growth.
Enterprise Policy Statement to Manage Business Growth will bring the
required transparency in the organizational functioning and its
understanding of business risk management. It will also indicate the level of
professionalism the enterprise intends to adopt. Further, it will also help the
creditor or other interested persons dealing with the enterprise in
determination of level of business involvement they intend to develop with

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the enterprise. The statement of growth will further facilitate in acquiring

adequate finance from the Financial Institutions. It will also be a mile stone
reading against the achievement of enterprise mission statement.
The policy statement will provide the information in sub-categories
proposed above. The statements made under this heading will be simple in
nature and understandable to the common man. This is also a voluntary
statement on the part of the enterprise but the appropriate regulatory
authorities will keep a close look in this matter. The statement should be
placed in the public domain, either in electronic form or in the nature of
physical publications.

Enterprise Succession Plan

The enterprises in unorganized and in many instances in organizational
sectors faces biggest challenge in determination of leadership succession.
Enterprise succession management plan should be determined in advance
giving appropriate weightage towards professional qualifications and
experience in the relevant business. The succession plan has to be disclosed
in advance.
The leadership in enterprises is not always chosen from professionally
qualified managers. So, the aptitude, foresight, professional outlook which
were available with the first generation promoter/s of enterprise might not
be available with the subsequent generations of promoter/s or manager/s.
So, undermining the professional skill or leadership may pose a challenge
towards the growth and sustainability of the enterprise. Further, it may pose
difficulty to outside stakeholder in building up longtime relationship with
enterprises in the event of uncertainty. So, proposing the qualifications of
prospective candidates or candidature will bring further transparency in
enterprise future course of actions.
Finding the appropriate successor of leadership in the enterprise is
essentially a job of existing management. Management has to lay down the
qualifications and procedure for selection of appropriate successor in
consultation with appropriate stakeholder, if any. The government or
regulator has very limited role to play in this regard. Importantly, regulator
may insist upon the disclosure of said qualifications and procedure within a
time frame. It is suggested that the enterprise should reveal the candidature
of successor at least six months in advance. The information of the
candidature should be in the public domain, either in electronic form or
otherwise through formal announcement.

Annual Management and Accomplishment Statement

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Annual Management and Accomplishment Statement is the self

assessment statement as compared to the policy statement made at the
beginning of the financial year. It will be made on all the sub-categories
mentioned in the policy statement.
This statement will be in the public domain; so the interested groups
will be vigilant about the enterprise performance and the factors, either
within or outside the enterprise, which affected the projected growth. This
will be a significant indicator for the government or regulator for assessing
the role of public institutions which has failed to extend necessary support
to the relevant industry/business. The information and data generated out of
this exercise will help the public institutes to frame policy for the betterment
of the sector.

Stakeholder relations and Welfare undertaken by the enterprise

Business is no more the maximization of financial interest of
promoter/partner/shareholder. Rather, it goes much beyond and stands for
sustainable business. The enterprise activities should be towards the benefit
of the employees, consumer and creditor. Further, its activity should be
environment-friendly and towards the protection of basic human rights.
Today, enterprises are part of social matrix. The experts enounce that
the enterprises gain access to the public money through banks & other
financial institutions and find required workforce and customer from the
society. It is receiving the resources from the society and redeploying its
assets into the society back. Therefore, the enterprises should be responsible
to act toward achieving maximum benefit to the society.

Legal and regulatory Compliance

Legal compliance is an essential parameter for good governance
practices. The compliance of law ensures that external governance
strengthens the internal governance structure. The corporate governance can
be strengthening public Institutional framework. In turn, it will create an
impact on internal organizational setup. Legal and regulatory due diligence
will bring the respectability of the enterprise within the society.
The enterprises are required to publish annually, through the electronic
media or otherwise, any ongoing litigation or other regulatory sanction that
has been imposed on it.
CONCLUSION
Corporate governance discussion spends lot of time to address
agency problem. Theorizing and translating the same to practical reality was
attempted in different jurisdictions and in certain cases demonstrated desired
results too. Agency problem was the result of deficiency in structural design

  17  
  

of corporate law. Separation of management from ownership in corporate

laws was with the objective to achieve functional efficiency which
ultimately maximizes the interest of shareholders. Societies across the
boundaries witnessed the models which have been proposed and implanted
to infuse more functional efficiency and minimize agency problem in
corporate system. Functional efficiency of corporate made it today a
preferred vehicle for business. In today’s world, functional efficiency should
not be the forerunner in modern corporate law, rather enhancing the
stakeholder interest and sustainable development ought to be the issues of
priority of corporate governance.
The representative models of stakeholders failed to achieve desired
goal in different jurisdictions, due to complicity in balancing the multiple
interests amongst stakeholders themselves and between stakeholders and
shareholders. It further impacted on functional efficiency of the corporate.
Some German Authors even indicated that Germany was actively
considering to withdraw the co-determination system. Management centric
model of USA advocated and provided greater autonomy to the
management, which worked efficiently in wealth creation and in achieving
the functional efficiency. But, corporate failures in consecutive years due to
varied reasons and its impact on US economy and world economy raised
eyebrows. So possibly, efficiency and wealth creation is not the issue rather,
it is sustainability. Sustainability is not only the functional management or
efficiency management but the same is even attached with the faith and
belief of the larger stakeholders.

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