Stakeholder Theory

• According to Edward Freeman's Stakeholders Theory (1984), shareholders are just one stakeholder group among many in a company.
• The goal of company executives should be creating value for all stakeholders without making trade-offs.
• Successful companies achieve this by aligning stakeholder interests.

Stakeholders

• A stakeholder is any entity (person, group, or non-human entity) that can affect or be affected by the achievement of an organization’s objectives.
• The relationship between a company and its stakeholders is bi-directional with each group having different expectations and claims from the organization.
• Successful enterprises require the support of all stakeholders.
• Examples include: employees, management, shareholders, suppliers, government, customers, society, community, and the environment.

Classification of Stakeholders

• Internal stakeholders include employees and management.
• Connected stakeholders include shareholders, customers, suppliers, trade unions, competitors and money lenders.
• External stakeholders include central and local governments, pressure groups/NGOs, and media.
• Classification of Stakeholders can also be done based on proximity to the organization.
• The primary stakeholders are those whose loss of participation directly affects the continuity of the organization.
• Primary Stakeholders include shareholders, customers, suppliers, government, banks, and insurance.
• Secondary stakeholders are those whose loss of participation will not affect the continuity of the company.
• Secondary Stakeholders include non-key employees and the local community.
• Active stakeholders participate in the organization’s activities like employees, managers, major shareholders, major suppliers and customers.
• Passive stakeholders do not seek participation in policy making which includes government, the general public, and most shareholders.
• Classification of Stakeholders can also be done based on how much stakeholders affect the organization.
• Classification of Stakeholders can also be done based on how much stakeholders engage with the organization.

Stakeholder Roles in Corporate Governance

• Stakeholders can affect and be affected by the quality of governance.
• Stakeholders who can affect and be affected by the quality of governance includes: Directors, Management, Trade Union, Customers, Regulators, Stock exchanges, Small investors, Company Secretary, Employees, Suppliers, External Auditors, Government and Institutional investors

Directors

• Powers of directors are set out in the Companies Act and the Articles of Association.
• Best corporate governance practices distinguish between the roles of executive directors, who manage the company full-time, and non-executive directors (NEDs), who primarily monitor.
• Directors are responsible for major policy and strategic decisions, both individually and collectively.
• Successful boards possess a mix of skills, and their performance should be assessed regularly.

Company Secretary

• Many companies are required to appoint a company secretary as a condition for registration.
• Company secretary ensures compliance with legal and regulatory frameworks.
• Company secretary duties vary by company size.
• Company secretary duties include arranging meetings, authenticating documents, and administrative tasks.
• A company secretary should be free from conflict of interest, and bear ultimate loyalty to the company.
• Company secretaries should be members of an accountancy or company secretarial body given the legal knowledge expected.

Government

• Governments typically do not have direct financial stakes in companies unless they hold shares.
• Governments have a indirect impact on companies, raising taxes on sales, profits, and shareholder dividends.
• Governments pass and enforce laws and establish regulatory frameworks.
• Governments provide funds for investment projects or offer tax incentives.

Stock Exchanges

• Stock exchanges allow companies to raise money and investors to transfer shares.
• Stock exchanges provide regulatory frameworks, stipulating listing rules such as the usage of BAS for financial statements.
• Stock exchanges impact corporate governance and reporting.
• In Bhutan, all listed companies must adopt BAS.

Institutional Investors

• Institutional investors are entities with large sums to invest in company shares like pension funds, insurance companies, and venture capitalists.
• Institutional investors have few protective regulations and are deemed knowledgeable enough to protect themselves.
• Institutional investors influence corporate governance decisions through their votes, play an important role in corporate governance and reporting.
• Institutional investors must communicate their feedback on governance code to companies.
• Institutional investors are now major stock market investors with significant power over companies.

Shareholders

• Shareholders have a right to inspect a company’s financial data.
• Shareholders wronged by their corporations have the right to sue.
• The main duty of shareholders is to vote on resolutions at general meetings.
• Shareholders vote on corporate matters like officers, mergers, acquisitions, and liquidations.

Employees

• Employees implement company strategies.
• Employees also give feedback and report misconduct.
• Employee contribution to corporate governance is implementing risk management and control procedures.
• Employees who are unaware of company risks are a major concern.
• Employees focus on the company's performance and its impact on their pay and working conditions.
• Employees need information about their immediate and future work environment.

Trade Unions

• Trade unions protect employee interests in pay, working conditions, and prospects.
• Trade unions will be concerned about lax control and risk environment which may jeopardize health and safety of employees.
• Trade unions influence corporate governance and act as a check on management, which also concerns shareholders.
• Trade Unions should be concerned about poor corporate governance such failure to communicate the employees by directors or failure to protect whistle-blowers.
• Good relationship with trade unions can have many benefits such sharing of Management’s values, ensure commitment of employees to implementing the strategy, increase productivity of employees.

Suppliers

• Relationships with suppliers can affect business through credit and service terms.
• Major Suppliers are especially critical in businesses where material costs and quality matter.
• Supplier cooperation improves asset management through inventory controls, such as JIT production.

Customers

• Customers have heightened expectations regarding the value of purchased goods and services.
• Dissatisfied customers voice opinions more than satisfied ones.
• Customers evaluate goods and services based on material needs and moral satisfaction.

External Auditors

• External auditors is one of the most important part of corporate governance.
• External auditors must be independent.
• External auditors must strike a balance between working constructively with company management and ensuring shareholder interests are served.
• Audit committees and accounting standards exist to help external auditors balance their roles.
• External auditors enable investors to have greater confidence in the information that directors/managers supply to them.

Regulators

• Regulators impact governance and risk management via rules and standards.
• Regulators such as the Companies Act provide minimum reporting of financial information and the audit of such financial statements.
• Regulators are mainly interested in maintaining shareholder-stakeholder confidence in information with which they are being provided.
• Regulators conduct inspections and audits that provides recommendations to improve governance.

Stakeholder Interests

• Customer interests include price and quality.
• Employee interests include fair treatment, incentives, a good working environment, and professional development.
• The Government may be interested in tax and fair employment policies.
• Maximizing returns are the interest of shareholders.

Meeting Stakeholder Interests

• A company must weigh stakeholders' power and interest levels to meet their needs.
• Mendelow’s Matrix can be a tool for this.
• Power refers to a stakeholder's ability to influence decisions.
• Interest refers to a stakeholder's effort to participate in company activities.
• Do not spend time or resources to manage stakeholders with low power and low interest.
• Keep the stakeholders with high power and low interest satisfied.
• Adequately inform the people, and talk to them to ensure that no major issues are arising, for stakeholder with low power and high interest.
• Require the attention, make sure to keep fully engaged, the stakeholders with high power and high interest.

Major Issues in Corporate Governance

• Abuse of Corporate Opportunity: Taking personal gains through the business opportunities that have come to the business.
• Composition and balance of the board (board dominated by single executive or “small kitchen cabinet” where other board members merely acting as rubber stamp; organisation run by small group around CEO/CFO, and appointments made through recommendations of them).
• Board composition is required to be balanced in terms of skills and talents, age, gender, nationalities (for MNCs).
• Financial reporting and auditing are crucial because of their importance in ensuring management accountability.
• Should company directors be responsible for financial reporting and external auditors.
• Lack Of Disclosure & Transparency.
• Excessive Directors’ Remuneration & Rewards.

Shareholder Rights and Responsibilities

• Stockholder theory posits that shareholders alone can legitimately influence a company.
• Stockholder theory focuses on the interests of shareholders.
• The shareholders should have the right to receive all the material information that may affect the value of their investment and vote on major company's decisions including company's governance.

Insider Trading

• Insider trading is trading based on non-public information obtained through work.

Commonly Used Governance Codes, Principles and Regulations

• G20/OECD Principles of Corporate Governance.
• The Financial Aspects of Corporate Governance.
• Sarbanes - Oxley Act of 2002.

Approaches in Corporate Governance

• Rules-Based Approach: Companies must adhere to legal requirements as prescribed in legislation.
• The consequence of non-compliance leads to penalties proscribed by the courts.
• Practically it is difficult to set up rules that are suitable for every set of circumstances.
• Principles-Based Approach: The board adheres to best practices.
• The principles-based approach provides the flexibility needed to address different circumstances
• Compliance or non-compliance judgments are being made by the owners of the business.
• This is the usual approach that most organizations in the world practice.