India: Evolving a Corporate Governance System for Resolving the Conflict Between the Pursuit of Shareholder Value and Sustainable Economic Growth

Last Updated: 14 December 2004

Article by Deeptarag Mukherjee and Gaurav Dasgupta


Shareholder value approach refers to a situation in which companies function only for the benefit of the shareholders. The only purpose of the management pursuing shareholder value is to maximize the returns to the shareholders.1

The common belief is that a management pursuing shareholder value will forgo the interests of the other stakeholders such as the employees, the customers, the environment, the creditors etc thereby producing a negative impact on the economy. Thus it has been portrayed that a shareholder value approach will be antithetical to the economic development.

But simply because the entire objective of the management is to maximise the shareholder returns2, it does not mean that such an objective is a hindrance to the sustainable economic development. This is so because it is in the interests of the shareholders that the interests of the economy be catered to by fulfilling the needs of the various stakeholders such as the employees, creditors, consumers, environment etc.3 The profit maximization in the long run, which is the objective of the shareholder value approach, is possible only through satisfaction of the needs of the various stakeholders in the short run.4 If the company wants to earn huge profits in the short run at the cost of its stakeholders, then such a move will antagonize the stakeholders and as a result the company will suffer huge losses in the long run. Thus such a short run approach will be opposed to the shareholder value pursuit, which aims at maximising profits for the shareholders in the long run. Hence there is no inherent conflict between pursuit of shareholder value and sustainable economic development because the shareholder value pursuit requires catering to the needs of the economy by fulfilling the interests of the various stakeholders.

Reducing Liability Towards Stakeholders For Maximising Shareholder Returns As Well As Achieving Economic Growth

There is a conflict between the interests of the shareholders and the economy regarding the issue of stakeholders. The shareholders would like to keep the number of stakeholders to the minimum so that they can influence the decisions without anyone else having a say over it. Otherwise the company will have to cater the needs of other stakeholders and will not be able to solely suffice to the shareholders needs.5 On the other hand, it is in the best interests of the economy to maximise the number of stakeholders. By this the economy can have control over the company’s affairs because then company would be answerable to various institutions apart from the shareholders6 that collectively form the economy. The question to be dealt with in such a situation is whether by catering to the economy’s interests, the shareholders interests are being jeopardised? This can be answered by formulating a ‘weakness-strength’ principle. This principle rests on the assumption that one person’s weakness is another person’s strength. It should be kept in mind that weakness refers to obligation towards a party, and strength refers to a right enjoyed by a party. Further, if the weakness is done away with (i.e. if the obligation is met, then the weak becomes strong because then the opponent will no longer be able to dominate over the other’s weakness (i.e. will no longer impose upon the other or will no longer claim a right over the other).

In the corporate situation, the stakeholders are the shareholder’s weakness/ liability (because the shareholders are answerable to the stakeholders) while the very same stakeholders are the economy’s strength (because the economy exerts control over the company’s functioning by setting up standards that are to be met). Now in order to independently maximise shareholder value, the liability or obligation of the company towards stakeholders (which is the weakness of the shareholders) will have to be reduced.7 One way of doing this is by satisfying their claims.8 Only when the company’s obligations towards the claimants are met do they lose their status of being claimants.9 To elucidate, if the company is satisfying the consumers or has paid the dues of the creditors, or is paying a just salary to its employees then its obligation towards them is met. If the company follows an internal system10 with checks and balances so devised such that the stakeholders automatically get their dues without having to separately claim for them then they lose their status of being stakeholders. This is because the term stakeholders refer to the ‘outsiders’,11 that is those who are different from the company but are affected by the company’s functioning. If the shareholders are collectively considered to be the owners of the company by virtue of the individual ownership of their respective shares,12 then everyone else who are affected by the company’s functioning are the stakeholders of the company. Thus if the company’s functioning procedure is so devised that the stakeholders are automatically taken into consideration as a part of this functioning then they lose their status of stakeholders because then they are no longer considered to be some ‘outsider’ who needs are to be separately catered to. In such a system, taking note of the stakeholders concerns will be part and parcel of the company’s functioning and whatever profits are left after such ‘functioning costs’ are met will be for the shareholders. By this the shareholders will also preserve their independence in the control over corporations because if the stakeholders do not remain ‘stakeholders’ then the question of their control over corporate management does not arise. Such a system will also serve the interest of the economy because in this case the company is automatically taking note of and catering to the stakeholders needs (who comprise of the economy). The economy’s best interests will automatically be considered without there being any formal representation of the various stakeholders in the governance structure and separate claims being made by them.

Achieving Shareholder Value As Well As Sustainable Economic Growth: What Is To Be Done?

Developing a Stable Situation in the Economy for Maximising Shareholder Gains

Sustainable economic development should aim at a stable economic scenario in which everyone’s needs are fulfilled and maximum satisfaction is guaranteed to all the players in the economy. A sudden growth of the economy followed by recession would not be ‘sustainable’ economic growth. For the growth to be ‘sustainable’, it should be ‘stable’. A ‘stable’ economy arises when the needs of all the stakeholders have been equitably met, thereby nullifying any disparity between the needs of individual players. This is possible through the emergence of a situation in which everyone engaged in the economic activity caters to the needs of the economy and also getting benefited in the process, finally leading to a wholesome optimal situation whereby the economy has progressed.

For economic development to be sustained, there should not be any disparity between the companies functioning in the economy and the economic scenario in which the companies are operating. To elucidate, if the economy is in a recession, and a few companies are doing good progress, then such a progress by the companies cannot be sustained for long because sooner or later the recession will affect those companies. For the growth to be ‘sustainable’ there should be a similarity in features between the companies and the economy, which will in turn bring stability in the economy. Stability in this case does not refer to saturation but a situation where there is no disparity and the individual players are working in tandem towards bringing about a common situation of wholesome development of the economy and also of them.

Now let us see what is to be done in order to achieve a stable situation mentioned above. An economic scenario in relation to a company comprises of its various stakeholders. Each company has some distinct characteristics which are similar or dissimilar to the characteristics of the economic scenario in terms of profitability, work culture, ethics etc. To elucidate, both the individual company and the economy might be in a recession thereby facing losses (similar characteristics), or one may be following ethical codes of conduct and the other may be stressing on profits rather than on ethics (dissimilar characteristics). The similar characteristics between the company and the economy cannot be exchanged. However, the dissimilar characteristics between a company on the one hand, and all the other stakeholders on the other hand (which is the economy for the company) can be exchanged between the two for their mutual benefit. For example, if a company is incurring losses, while the economy is progressing, then the company will try to follow the trend and start making profits. Similarly, if a company follows a very professional work culture, then that may be emulated by the economy. Everyone will contribute his distinct advantage which will be incorporated by others for the overall benefit of the economy, and a harmonious situation will be attained in which everyone is benefited. All the companies in the economy will contribute their respective distinct characteristics which will result in a wholesome optimal situation in the economy. In such a situation, each company will not be catering to the needs of the entire economy. But each will be contributing his distinct part to the economy, the sum total of which will lead to the economic development as a whole.

Since in the aforesaid scenario, the distinctiveness between the company and the economy will be nullified while the similarity will be retained, each company will have the same characteristic as that of the economy. This is termed as the ‘stable’ situation, which can be achieved in the process of pursuing shareholder value because the exchange of distinct characteristics between the company and the economy for their mutual benefit leads to profit maximization in the long run thereby enhancing shareholder gains.

The Company should adapt itself to the Economic Scenario

In order to be in harmony with the economic scenario, the company has to regularly foresee the change that is going to change place in the economic climate and then adapt itself accordingly. If this is done then the question of a clash between the interests of the company, the shareholders and the economy will never arise. If the company’s management adopts a policy whereby the corporate functioning is modified to suit the changing needs of the economy13 instead of being restricted to the needs of the shareholders, it will result in better performance of the company thereby leading to increased profitability. Such increased profitability will benefit the shareholders thereby satisfying them.

A company operates in an economic scenario and is affected by it. Shareholders provide capital for the establishment and functioning of the company but it is the economic, social and political environment that determines the fate of the company. So a company owes its continued existence more to the economy than to its shareholders. Owing allegiance to the economy means working in harmony with and catering to the needs and requirements of the economy. This involves changing the corporate priorities according to what the economy demands.14 If this is done, then it will lead to an effective functioning of the company and bring in prosperity. This will keep the shareholders satisfied and they will not have problems with the decisions taken or policies adopted by the management in furtherance of the economy’s needs.

Achieving Shareholder Value As Well As A Sustainable Economic Growth: How It Is To Be Done?

The Board of Directors, which is the trustee of the corporation and not of the shareholders,15 forms the mind of the company.16 It is the Board of Directors that does the ‘thinking’ for the organisation and takes decisions on the behalf of the organisation based on the subjective evaluation of the objective data. This ‘thinking’ should be through application of intelligence, which is possible only if they have the knowledge so as to be able to distinguish between what is proper and what is improper for the organisation. The objective data that are the basis of a decision are determined by the market forces, over which the directors have no control. The function of the directors is to intelligently find out what is the best option that they have keeping in mind the data.

The expectation of a desired result should have no role in the subjective evaluation or the thinking process because the outcome of what a director thinks to be the right and the best may not bring in the desired effect wanted by the directors. This is so because the outcome of an activity is determined by a number of fluctuating market forces which can neither be controlled nor be predicted by anyone. Thus a decision should be based on what is considered to be the most appropriate step keeping in mind the present circumstances rather than basing it on what is desired.17

For the Board of Directors to function in the best interests of the company as well as the economy, they should be able to take independent decisions free from bias. But in cases where any particular individual or an institution holds majority of the shares, they control the formation of the Board of Directors including the independent directors.18 In such situations, the directors tend to be subservient to the wishes of these majority shareholders because then these directors owe their position to those majority shareholders. As a result, the interests of the shareholders are promoted at the cost of the company19 and the economy.

So the remedy is to form a Unitary Board20 comprising of 50% of the directors as independent directors. The shareholders, institutional investors and other stakeholders will determine the remaining 50% directors. The need for having a 50% representation by independent directors is that it will ensure that no decision can be passed by the Board which are malicious. Even if a shareholder having an absolute majority wants to get a resolution passed which will harm the company and the economy in the long run, he can exercise his clout only up to a maximum limit of 50% of the Board of Directors. In the case of a deadlock, the matter may be submitted to the Judiciary.

These independent directors will be appointed by an independent National level Corporate Governance Council which will maintain a list of the names of persons who have voluntarily agreed and also qualify to be appointed as independent directors in various companies. The Corporate Governance Council will appoint these directors in various companies from time to time and it will be the sole discretion of the Council as to which director will be appointed in which company. The Council will also regulate their tenure. This system will facilitate independent functioning and decision making by the Board of Directors.

For the effective functioning of the aforesaid system, there should be a free flow of information between the management and the independent directors.21 Unlike the Managing Director, an independent director will not engage in day-to-day affairs of the company. So a mechanism has to be developed by which the information regarding daily matters is available to the independent directors so that they can make an informed decision when required while preserving their objectivity.22 For this, various Committees are to be formed which will be the link between the management and the Board of Directors. These committees will carry on the management functions in their respective areas and will supply a weekly report of the functions discharged to the Board of Directors. This will keep the independent directors abreast of the recent developments and they will be able to take independent and informed policy decisions in the Board of Directors meetings. In this way the interests of the shareholders, the company and the economy will be catered to in an equitable manner without any prejudicial treatment to any of them.


There is no conflict between the pursuit of shareholder value and sustainable economic growth. The traditional notions that have compartmentalised the shareholder value and economic growth have to be done away with. A proper system needs to be devised which will maximise the profits for the shareholders and also cater to the interests of the economy.


1. See Dr Saleem Sheikh, Corporate Social Responsibilities: Law and Practice 21 (1996) (the traditional notion was that the corporate managers owed fiduciary duties towards shareholders which was based on the theory that the aim of the corporation was profit maximization).

2. Id. at 36 (the shareholders have the command to compel directors to pursue their sole objective of profit maximization).

3. Id. at 22 (profit maximization is one of the company’s main objectives and is compatible with the social responsibilities of the companies).

4. Id. at 40 (the American Law Institute in its report on corporate governance published in 1994, maintains that companies should pursue long term profit maximization. An activity that entails a short-run cost to achieve an appropriately greater long-run profit is not therefore a departure from the economic objective. An orientation towards lawful, ethical, and public-spirited activity will fall within this description).

5. See Sheldon Leader, Private Property and Corporate Governance Part I: Defining the Interests, in Perspectives on Company Law: 1, 104 (Fiona Macmillan Patfield ed., 1997) (even though the shareholders are the owners of the company the company does not exist in order to satisfy the totality of their interests).

6. Id. at 105 (it was discussed that the corporate interests are not to serve any particlular interest group but to successfully carry out operations as stipulated in the objects clause).

7. Id. at 93 (any increase of revenue going to a shareholder is a reduction of that going to another interested party, such as an employee or a creditor).

8. Id. at 90 (the independence of the company’s interest consist in being attached to those interests which when satisfied helps in furthering the purpose for which the company exists).

9. See Anne Carver, Corporate Governance-Capitalism’s Fellow Traveller, in Perspectives on Company Law: 2, 70 (Fiona Macmillan Patfield ed., 1997) (stockholders are beneficiaries by position only).

10. See S.B. Mathur, Corporate Governance-Concept and Issues, 27 Chartered Secretary 519 (1997) (desirable corporate governance need evolution of internal standards).

11. See John Kay and Aubrey Silberston, Corporate Governance, in Perspectives on Company Law: 2, 63 (Fiona Macmillan Patfield ed., 1997) (there are two relevant groups of outsiders: the company’s existing stockholders and prospective bidders).

12. Id. at 53 (it was elucidated through an example that the shareholders own their shares in a company and not the company). See supra note 5, at 97 (it was discussed that although the company is the property of the shareholders, they cannot override management interests of what is in the best interests).

13. See supra note 1, at 159 (it is the responsibility of the managements to ensure that their companies are good corporate citizens, caring not just the needs for those with a direct stake in business but for the general public and the environment in the broadest sense of the term).

14. See supra note 1, at 19 (corporate social performance is a relative term whose dimensions will change with the change of society’s perceptions , attitudes and understanding).

15. See John Kay and Aubrey Silberston, Corporate Governance, in Perspectives on Company Law: 2, 61 (Fiona Macmillan Patfield ed., 1997) (the board of directors are the trustees of the tangible and intangible assets of the corporation rather than the agents of the shareholders, whose duty is to preserve and enhance the value of the assets under his control and to balance fairly the various claims to the returns which these assets generate). See supra note 1, at 151 (directors owe fiduciary duties to their company and not to shareholders or creditors).

16. See Dr. K.R. Chandratre, Role of Board of Directors in Emerging Dimension of Corporate Governance and Impending Changes in Law, 27 Chartered Secretary 506 (1997) (the Board of Directors is called the directing mind of the company).

17. See also supra note 11, at 58-59 (it was explained through an example of a doctor patient relationship that motivation to increase income does not lead to an increase in income. A successful doctor is the one who puts his patients first because of his genuine concern rather than the one who puts his patients first because he believes that such behaviour is a good commercial strategy).

18. See Anne Carver, Corporate Governance-Capitalism’s Fellow Traveller, in Perspectives on Company Law: 2, 70 (Fiona Macmillan Patfield ed., 1997) (the shareholders exercise indirect control to appoint and to dismiss the directors). See supra note 1, at 31 (the control lies in the hands of the individual or group who have actual power to select the board of directors or its majority either by controlling a majority of the votes or by exercising pressure which influences their choice).

19. See Pender v. Lushington, (1877) 6 Ch D 70 (shareholders may use the property rights to act against the spirit of the company’s articles).

20. See Sir Adrian Cadbury, The Response to the Report of the Committee on the Financial Aspects of Corporate Governance, in Perspectives on Company Law: 1, 28 (Fiona Macmillan Patfield ed., 1997) (stating that an unitary board has the duty to supervise and to manage).

21. See Lynne L Dallas, The Global Corporate Board of Directors: A Proposal for Reform, in Perspectives on Company Law: 2, 110 (attention should be given on the availability of information and other resources to enable the Board to monitor effectively). See also D.S. Mehta, Corporate Governance: Role of Professionals, 27 Chartered Secretary 521 (1997) (deals with the various kinds of information which are to be made available to the Board for effective corporate governance).

22. See supra note 19, at 29 (Fiona Macmillan Patfield ed., 1997) (dealing with the need to strike a right balance on a board between becoming sufficiently involved in the detail of a business to know what is going on, while remaining sufficiently detached to preserve objectivity).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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