By Asish K Bhattacharyya
Will the new CSR provision in the Companies Bill, 2012, lead to adoption of best business practices?
‘Responsible business’ is a buzzword today. The question is whether the new CSR provision (clause 135) in the Companies Bill, 2012, will lead to the adoption of best business practices by companies. The author is sceptical. The Companies Bill has not extended Board’s fiduciary duties to stakeholders, other than shareholders.
It is well established that the board of directors of a company has fiduciary duties to the company and its shareholders. Two basic fiduciary duties that the Board owes to the company and shareholders are duty of loyalty and duty of care. In recent years, the duty of disclosure has been added to the list of fiduciary duties. Duty of loyalty says that the Board will protect shareholders from ‘self dealing’ by the executive management or by a group of shareholders. The duty of care says that the Board should take ‘good decisions’. Courts apply the ‘business judgement principle’ when a decision is challenged in the court. In absence of an abuse of discretion, the court respects the business judgment and does not get into second-guessing. The duty of disclosure says that the Board should provide complete information to shareholders on timely basis and also when shareholders’ are required to vote and on related party transactions.
Although courts elaborated fiduciary duties even when those were not codified in law, the principles are still evolving. The courts and regulators are reluctant to extend it to other stakeholders, although those other stakeholders are lobbying for the expansion.
In a recent judgment (North American Catholic Educational Programming Foundation, Inc v. Gheewalla, 930 A.2d 92 (Del. 2007), the Delaware Supreme Court (US) observed “Creditors of a Delaware corporation that is either insolvent or in the zone of insolvency have no right, as a matter of law, to assert direct claims for breach of fiduciary duty against its directors.” The Supreme Court further observed “Delaware courts have traditionally been reluctant to expand existing fiduciary duties. Accordingly, “the general rule is that directors do not owe creditors duties beyond the relevant contractual terms.”
The new section 172 of the UK Companies Act, 2006, which is considered ‘modern’, in whatever sense the term is used, requires a director to act in the good faith to promote the success of the company for the benefit of the members as a collective body. Although the law requires directors to take into consideration certain factors, which include, the interests of the company’s employees and the impact of the company’s operations on the community and the environment, it has not expanded Board’s fiduciary duties.
The Companies Bill, 2012, has introduced a new provision (clause 166) on duties of directors. One of the duties listed in that provision is to “act in good faith in order to promote the objects of the company for the benefit of the members as a whole and in the best interest of the company, its employees, the shareholders, the community and for the protection of environment.” One of the roles of independent directors listed in the Code of Conduct provided in Schedule IV to the Bill is to ‘balance the conflicting interest of the stakeholders’. A plain reading of these two provisions together gives the impression that the Bill extends the Board’s fiduciary duties to employees, and community. However, this may not be so. The new provision (clause 245) on class action suit gives that right only to shareholders and depositors and not to others.
The Bill does not provide any remedy to any stakeholder other than shareholders if the company fails to address their reasonable expectations and concerns. Contractual terms and other laws and regulations protect their rights. They can also take recourse to Public Interest Litigation (PIL), a remedy that is already available to them.
The present approach, globally, is to enhance disclosure requirements and leave it on investors to take a call on whether to invest in a company that has not adopted best practices and fails to act responsibly towards stakeholders. India has also adopted the same approach. Institutional shareholding have gone up many fold over the past decade and it is expected that institutional investors will take a long-term view and will assign higher weight to corporate governance in investment decisions than that by retail investors. But, unfortunately, only pension funds have the luxury to take a long-term view and invest only in responsible companies. Mutual funds and others do not enjoy that luxury because their unit-holders prefer to consider only financial performance in investment decisions and take short-term view. Therefore, in India, the process of inducing companies to adopt best practices will be very slow.
The initiative of the government is commendable. But let us not expect too much from those initiatives.
Affiliations: Professor and Head, School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs; Advisor (Advanced Studies), Institute of Cost Accountants of India; Chairman, Riverside Management Academy;Email: email@example.com
(Article First Published in Business Standard, April 28, 2013 )