Corporate Governance refers to the system of rules, processes and policies by which a company is controlled and managed. These rules and policies dictate the corporate behavior of all entities in the company and ensure that the company achieves its objectives. Corporate Governance also involves the interaction between various stakeholders in shaping the corporate performance of the company.
Good corporate governance ensures that the Board of Directors is accountable and transparent in handling the affairs of the company, taking into account the interest of all stakeholders and acting in the overall best interest of the Company. It aims at protecting and balancing the interest of all stakeholders in a company and ultimately ensuring that the company thrives in all aspects.
By its very nature, Corporate Governance ensures transparency and accountability in the administration of a company and is very crucial to improving a company’s performance, enhance investor trust, combat corruption, reduce risks of corporate crisis and scandals etc.
Accordingly, the Board (for instance) is saddled with the responsibility of protecting the interest of all stakeholders in the company, in the overall best interest of the company. Whilst the interests of these stakeholders often conflict, it behooves on the Board to appropriately strike the right balance between the conflicting interest of shareholders whilst ensuring the goals and objectives of the company are achieved. This paper seeks to consider and analyse the how the conflicting roles of stakeholders may be balanced and the role of the board of directors in achieving this.
The Stakeholders Theory Of Corporate Governance
Corporate Governance has been viewed from different approaches, one of which is the Stakeholder approach/ theory.
The Stakeholder theory posits that a company owes a responsibility to a wide range of stakeholders even beyond the shareholders/ members of the company.
Proponents of the Stakeholder theory believe that the aim of sound corporate governance is not just to meet the objectives of shareholders, but also to have regard for other persons and groups who have a stake in the company one way or the other, including the public at large.
The Stakeholder view of Corporate Governance is that the purpose of Corporate Governance is to satisfy the objectives and the needs of all key stakeholders in a company, as far as possible. These stakeholders include; shareholders, employees, investors, major creditors, customers, suppliers, the government, local communities, and the general public. Therefore, the Board must put into consideration the interests of all stakeholders in the administration of the company.
Edward Freeman, one of the foremost proponents of the Stakeholder theory recognised the theory as an important element of Corporate Social Responsibility (CSR) . Today, many believe that the impact and influence of companies on society is so strong that they should be accountable to the public for their activities.
The stakeholders in a company may be broadly categorized as financial stakeholders and other stakeholders.
Financial Stakeholders are those stakeholders who have financial interest or stake in the company. This class of stakeholders includes the shareholders and lenders/ creditors of the company . The shareholders would ordinarily have a stake in the company because they own shares in the company and are the owners of the company.
They are interested in having their shares yield maximum returns and increase in their dividends. Ultimately, shareholders are interested in ensuring that the company remains profitable at all times. Similarly, although lenders/ creditors of companies provide debt capital to a company and are not owners of the company they nevertheless have financial interests in the companies in whose credit they are and expect the payment of interest as well as the sums invested, as at when due.
According to the Stakeholder theory, other stakeholders in the company include the management, employees, Board members who are non-shareholders, and the general public . The Chief Executive Officer (CEO) as a key member of the management of the company has a stake in the company as he/ she is interested in retaining the power, authority and status that comes from occupying his position as CEO, as well his high remuneration package. Board members who are not shareholders of the company also have a stake in terms of their remuneration packages and their portfolio with the company.
Also, employees have a stake in the company because it provides them with a job and a source of income. They are more concerned about their job security, suitable working conditions, welfare packages, good pay, among others. Additionally, the public at large has a stake in the company as they depend on the goods and services produced or rendered by the company to carry on with their daily activities. The public also expects companies to take on CSR projects that would be beneficial to society.
Given the above, a major concern with corporate governance is striking the right balance between the conflicting interests of these multifaceted stakeholders in a company. This concern is profound for the Board of Directors who are responsible for regulating the affairs of the company and ensuring that the company achieves its set objectives whilst catering for the interest of stakeholders in the company. Often times, the interest of the Board may differ from the interest of other stakeholders of the company, and what the Board may consider as necessary and expedient for the company may be seen as unnecessary or untimely by other stakeholders, hence the necessity for good Corporate Governance.
The Role Of The Board In Balancing The Conflicting Interest Of Stakeholders In A Company For Effective Corporate Governance
Undoubtedly, the Board owes a duty to the company and its stakeholders to ensure that the Company is managed and controlled effectively for the attainment of its set goals. To effectively discharge this duty, the Board must always consider the effect of its decision on the company and its stakeholders .
In arriving at any managerial decision, the Board must consider the interest of all stakeholders and consider the long term impact of the decision on the company and its stakeholders. To this end, corporate governance codes are imperative for companies as they set out protective and monitoring mechanisms to prevent the Board from acting solely in their own interest. These codes also provide guidance to the Board in striking the right balance between the conflicting interests of stakeholders in the company for effective corporate governance.
In striking the right balance between the conflicting interests of all stakeholders, the Board may be guided by these corporate governance principles which are embedded in most corporate governance codes:
- Fairness
In managing the affairs of the company, the Board must be guided by the principle of fairness . The Board should ensure the fair treatment of all shareholders in the company, including the minority shareholders.Beyond treating all shareholders fairly, the Board must also ensure that its employees are treated well and fairly by providing good working environment, good remuneration and good welfare packages. The Board should also ensure that the needs of its customers are met by providing quality goods and services.To achieve this, the Board must realise that all stakeholders have a part in the company which is proportionate to ownership. - Transparency
Stakeholders want to be carried along at all times and rest assured that the affairs of the company are efficiently handled by the Board. To this end, the Board must make the necessary disclosures to shareholders and stakeholders in the company as at when due. This includes information on the financial position/ performance of the company, the performance and profitability level of the company, the governance and ownership structure of the company, among others.This information may be contained in the company’s annual reports which should be available to all shareholders and stakeholders. The company may also make use of its website in providing relevant information to stakeholders to keep them updated at all times . The principle of transparency also requires that senior managers and Board members must disclose any conflict of interest which may arise in the course of handling the affairs of the company. - Inclusiveness
The Board must recognise the rights and interests of all stakeholders in the company and ensure inclusiveness of all stakeholders in the administration of the company. The rights and interests of stakeholders established by the law and those set out by mutual agreements/ contracts, must be respected and upheld by the Board. Inclusiveness of all stakeholders encourages active co-operation between the company and the stakeholders in achieving the company’s goals. By accommodating and understanding the views, interests and perceptions of all stakeholders in the company, the Board is better positioned to manage the affairs of the company.These principles are crucial for effective corporate governance and are instrumental in providing guidance to the Board in balancing the conflicting interests of stakeholders in the company for effective corporate governance.
Conclusion
Undoubtedly, the Board of every company has the duty to effectively administer the affairs of the company for the attainment of its set goals and objectives. In discharging this duty, the Board is saddled with the responsibility of striking the balance between the conflicting interests of stakeholders in the company. To undertake this task, the Board should be guided by the principles of fairness, accountability, transparency, inclusiveness, and the respective Codes of Corporate Governance applicable to the company for effective corporate governance.