By N. Balasubramaniam

Whose company is it, anyway? At least in the developed, Anglo-Saxon, capitalist world, the answer would, unequivocally, confirm that the company belongs to its owners, the equity shareholders. That, however, is not the final word on the subject. In several other countries like Japan and Germany, numerous other stakeholder groups would also figure in the response. What is India's stand on this issue?

Torn between its traditional Sarve Janah Sukhino Bhavanthu (let everyone be happy) culture and its competitive free-market dynamism, which is modeled on the lines of the US, the country's position is, understandably, ambivalent. Thus, the Confederation of Indian Industry's 1998 Code of Desirable Corporate Governance promptly limits claimants in the first instance to shareholders and various types of creditors. Likewise, the Securities & Exchange Board of India's Kumarmangalam Birla Committee on Corporate Governance, at its first meeting on June 4, 1999, agreed that the basic objective of corporate governance should be ''the enhancement of long-term shareholder value while at the same time protecting the interests of the other stakeholders.''

Why are shareholders accorded this primacy of treatment? Essentially because they own a slice of the company through their shareholding. Creditors have fixed claims and employee remunerations are, generally, negotiated in advance of performance. As residual claimants, shareholders have the appropriate incentives to take discretionary decisions and bear their consequences as well. As such, they justify their claim, legally and morally, to be the owners of the business with important control line rights.

Not everyone agrees. For example, in Japan, the company and its employees are treated like a family, with shareholders often cast in the role of poor relations. The view appears to be that an employee who devotes his or her life to a business has, morally, a bigger stake in it than a shareholder. Another nation where stakeholder-recognition is high is Germany. The two-tier board system or the co-determination model bringing together management and labour is, in itself, sound evidence of the involvement of employees in the governance structure of the corporation.

There are more than mere rumblings in the bastions of the camp that advocated shareholder primacy as well. In a seminal contribution to the corporate governance debate in 1995, The Brookings Institution's Margaret Blair argued cogently that most modern-day corporations have numerous other stakeholders who also have to bear the residual risk in a corporation. Stakeholder as an expression, is itself fairly recent in origin, reportedly appearing first in a 1963 internal memorandum at the Stanford Research Institute in the context, curiously, of generalising the notion of shareholders as the only group to whom the management of a company needs be responsive to. According to a 1984 Edward Freeman definition, a stakeholder is any group or individual who can affect, or is affected by the achievement of the organisation's objectives. Friedrich Neubauer and Ada Demb in The Legitimate Corporation identify 6 groups of commonly distinguishable stakeholders: providers of funds, employees, general public, government, customers, and suppliers, not necessarily in that order.

Interestingly, though, in the context of the governance debate, particular attention seems to be focused mostly on 2 of these 6 groups: shareholders and employees. Customers comprise the third group of attention, not so much for their stake in the company, but for the company's stake in ensuring they are fully delighted. In developing countries, the public as a stakeholder group is often ignored although societal activism is on the rise. The government is, often, left to tend for itself through its regulatory and punitive measures. Suppliers appear to be ill-provided for in terms of corporate accountability-a situation that needs attention, particularly in these days of outsourcing and sub-contracting. The associated issue is one of clearly differentiating between the real stakeholders and others who are, at best, constituencies, as Adrian Cadbury terms them.

There is unanimity among academics, regulators, and corporate managers on the imperatives of co-existent and collaborative solutions to the shareholder-stakeholder problems. Significantly, the 1998 Corporate Governance Report to the OECD by its Business Advisory Group headed by Ira Millstein, the US lawyer and governance guru, while unequivocally asserting the generation of long-term economic gain to enhance shareholder value as a corporation's central mission, also recognises the link in success and its ability to align the interests of shareholders and stakeholders (limited in this context to mean directors, managers, and employees).

On the larger issue of societal interests, the OECD document admits that, at times, there may have to be a trade-off between short-term social costs and long-term benefits to society in having a healthy, competitive private sector, and recommends that societal needs that transcend the responsive ability of the private sector should be met by specific public policy measures rather than by impeding improvements in corporate governance and capital-allocation.

Could this be the beginning of an integrated corporate governance model that seeks to straddle the competing claims of shareholder primacy and stakeholder stridency? It would appear to be the most balanced approach to corporate governance in recent decades. There is, indeed, striking evidence that successful corporations have almost always practised these precepts without perhaps, labelling them with such clarity. Illustratively, GE is an impressive case. Its long-time CEO, Ralph Cordiner, called its top management a trustee responsible for managing the enterprise ''in the best balanced interest of shareholders, customers, employees, suppliers, and plant community cities.'' Decades later, its current CEO, Jack Welch, presides over a company rated the Most Admired Company in the world in a 1999 Fortune survey.

Nearer home, the 5-year vision of Wipro Corporation, again in the top ten in terms of capitalisation, puts its people first. Its compatriot, Infosys Technologies, thrives on its objective of making thousands of its employees millionaires through the company's stock-sharing programmes while retaining a top slot in the capital market and attracting international investors. Both are companies whose success can, in part, be attributed to their standards of governance. This, the phenomenon of the market rewarding sound governance, will gain prevalence in the 21st Century.

N. Balasubramaniam is the head of the Centre for Development of
Cases & Teaching at IIM-B

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