Corporate Governance: Board of Directors and Shareholders Dynamics

Understanding The Relationship Between The Board Of Directors And Shareholders Through Corporate Governance

I . Abstract

This paper discusses the relationship that exists between the board of directors of a company and the shareholders of the company. The paper aims to understand the relationship and its impact. This paper focuses on statutes, and regulations like the Companies Act 2013, Listing Obligations And Disclosure Requirements, and Securities And Exchange Board Of India Regulations. It discusses best practices and models that are used along with their limitations and recommendations. The paper also inspects several important cases that will give a better insight of the relationship between them. The primary question this paper will try to solve is the relationship between the board of directors and how can it be improved.

II. Introduction

“Shareholder value gets lost when things are done illegally when principles of corporate governance are not adhered to when cohesive action is not taken”

– Cyrus Pallonji Mistry

Accountability, transparency, risk management, fairness, and responsibility are the core principles that govern corporate governance. Corporate governance is a set of rules, regulations, practices, and processes through which a company is functioned and guided. In the words of the Cadbury Committee corporate governance has been defined as a system by which companies are directed and controlled.[1] In any company, the key players in corporate governance are board of directors, stakeholders and shareholders, and officers. These three act as a form of check and balance and help contribute to the better working of a company.

Corporate governance refers to the accountability of the Board of Directors to all stakeholders of the corporation i.e. shareholders, employees, suppliers, customers, and society in general; towards giving the corporation a fair, efficient, and transparent administration

The board of directors and shareholders share a unique and complex relationship in which their rights, duties, and responsibilities differ despite sharing a common goal. It is crucial to understand nature for a multitude of reasons. Under corporate governance, all shareholders have to be treated equally and fairly. A stakeholder needs to know their rights and how can it be exercised to ensure equality and fairness. The board of directors refers to a group of individuals that are held responsible for culpability, fairness, diversity and transparency under corporate governance.

III. Scope and objective

Scope of this paper is as follow.

1. Understand who are board of directors and stakeholders. Theirs rights, responsibilities, and differences.
2. Understanding the nature of their relationship.
3. Overview of the Indian corporate governance framework and the companies act 2013.
4. Different types of theories.
5. Limitations and recommendations
6. Analysis of the cases

IV. Who are board of directors?

As per Company Act 2013, section 2 subsection 10[2] Board of directors or board has been defined as a collective body about the company. A board is a governing body of either elected or appointed persons regularly meeting to set corporate management policies and oversee an organization’s activities. The pivotal case of Ferguson v. Wilson[3] determined that directors act as agents for a company. A company isn’t a real person and can work through its directors. This means the connection between a director and their company resembles that of a principal and agent. When a director signs for the company, the company bears responsibility, not the director.

In the Company Act, 2013 certain types of directors have been, mentioned along with their appointments, rights, and responsibilities. Though a maximum of 15 (fifteen) board of directors have been mentioned under the Company Act, 2013 which can be increased by an amendment and the minimum number is 2 for private companies and 3 for public companies[4].

A company’s articles of association and corporate bylaws shape the makeup and authority of the board. These bylaws can decide how many people sit on the board, the way board members get picked (like through a vote by shareholders at a yearly meeting), and how often the board gets together. The board meets on a set schedule.  A board of directors holds several responsibilities in terms of corporate governance like

1. The Fiduciary Duty: Board of Directors have one of their main obligations to act on behalf of the company and its owners. In other words, they are bound to what is called the fiduciary duty which obliges them to make decisions that enhance the shareholders’ wealth over time. That said, it does not mean that other stakeholders are disregarded or suffer during this process.
2. Balancing Stakeholder Interests: Good corporate governance takes into account the different interests of various stakeholders that must be balanced delicately. Shareholders want dividends and seizing market opportunities, while employees expect job security and fair treatment; customers look after quality goods and services delivered at competitive prices; whereas communities opt for responsible and sustainable operations by firms in their jurisdiction. Consequently, the Board has to consider all these interests while ensuring that it does not compromise on the overall performance and credibility of the firm in question.
3. Ethical and Responsible Leadership: The Board sets the tone for the company’s ethical and responsible conduct. It establishes a corporate culture that promotes transparency, accountability, and compliance with legal and ethical standards. It is essential for the Board to lead by example and ensure that ethical behavior is upheld throughout the organization.
4. Risk Management and Sustainability: Stakeholders, including shareholders, are increasingly concerned about the long-term sustainability of companies. Boards are responsible for identifying, assessing, and mitigating risks that may impact the company’s ability to deliver sustainable returns and fulfill its obligations to all stakeholders. This includes environmental, social, and governance (ESG) factors that have gained prominence in recent years.
5. Engagement and Communication: There must be an open and effective communication between the Board and its stakeholders. There is a call for shareholders and other stakeholders to have the relevant information on the performance of the company, strategy, and the decision-making process. It is through these channels that one satisfies their stakeholders through the ways of annual meetings, reports, and feedback mechanisms. This, as such, brings about trust and transparency.

V. WHO ARE SHAREHOLDERS?

A shareholder is viewed as an individual, company, institution owning a certain share of stock in a firm or a mutual fund share. Shareholders are technically the owners of a business-a fact entitling them to a proportion of the profits.

When a business is successful, shareholders benefit from the increased valuation of stock or the profits of the business distributed as dividends. Shareholders have the additional right to vote in corporate elections. Of course, when a business loses money, the share price drops, with the possible result of causing shareholders to take a loss. If the corporation fails, corporate assets remaining after paying the debt of the corporation are distributed to the shareholders.

Shareholder Rights:

According to a corporation’s charter and bylaws, shareholders traditionally enjoy the following rights:

• The right to inspect the company’s books and records
• The power to sue the corporation for the misdeeds of its directors and/or officers
• The right to vote on key corporate matters, such as naming board directors and deciding whether or not to green-light potential mergers
• The entitlement to receive dividends if the board decides to pay them
• The right to attend annual meetings, either in person or via conference calls
• The right to vote on critical matters by proxy, either through mail-in ballots or online voting platforms if they’re unable to attend voting meetings in person
• The right to claim a proportionate allocation of proceeds if a company liquidates its assets[5]

VI. Interaction of Shareholders and Directors

The connection between shareholders and directors is crucial in corporate governance. Their frequently intricate interactions have a major influence on a company’s direction, culture, and performance.

1. Communication Channels: Effective communication between shareholders and directors is critical for developing trust and mutual understanding:

Annual General Meetings (AGMs) are formal events at which directors deliver annual reports, firm performance measures, and future strategies to shareholders. It is also a forum for shareholders to raise questions, express concerns, and vote on important matters.

Quarterly reports give shareholders with insights into the company’s financial health, updates on key happenings, and management’s vision for the business. Directors ensure that these reports are accurate, thorough, and reflect the company’s current situation.

2, Conflicts and Resolutions

Despite shared interests, shareholders and directors may occasionally disagree owing to divergent viewpoints or priorities:

While directors may be focused on long-term strategic objectives, certain shareholders, particularly short-term investors, may prioritise rapid financial gains. To keep these conflicts from weakening corporate governance:
Transparent disclosure processes may help shareholders stay informed.
Regular discussions and feedback loops are examples of engagement activities that might help to bridge understanding gaps.
Disputes can be resolved by mediation or arbitration.

3. Collaborative Initiatives

Collaboration among shareholders and directors can result in more comprehensive and informed decisions:

Joint Committees or Task Forces: By forming committees including directors and important shareholders, businesses may ensure that multiple perspectives are addressed for major strategic initiatives or crisis management.

Shareholder Proposals: Under modern governance, shareholders, especially substantial holders, have the capacity to table matters for consideration. These may range from various proposals regarding operational matters to sustainability proposals that the board can discuss and refine in unison with the shareholders.

Even though there is a potential for conflict between shareholders and directors due to their difference in vantage point, good communication and collaboration mechanisms make these interactions harmonious, which essentially elicits corporate success and stakeholder value.

VII. Conclusion

Corporate governance is the backbone of modern corporations, underpinning their functionality, sustainability, and, ultimately, their success. At the heart of this intricate structure lies the interplay between shareholders and directors, a relationship teeming with synergy and occasional tension.

This exploration has shed light on the intricate dynamics between shareholders and directors, emphasizing their roles, responsibilities, and the channels through which they interact. From the historical evolution of corporate governance in diverse global markets to the nuances of communication, conflict, and collaboration, it’s evident that understanding these dynamics is not just beneficial—it’s imperative.

Looking ahead, the future of corporate governance is poised for further evolution. As technology advances, environmental concerns grow, stakeholder expectations shift, and global markets become more interconnected, the demands on shareholders and directors will intensify. Adapting to these changes while staying rooted in transparency, accountability, and value creation will be the hallmark of successful corporations.

While the corporate governance landscape will continue to transform, the essence of its purpose—to ensure companies are run responsibly and ethically for all stakeholders—remains steadfast. Understanding the dynamics between shareholders and directors will remain central to navigating this evolving terrain successfully.

[1] https://rajdhanicollege.ac.in/admin/ckeditor/ckfinder/userfiles/files/Corporate%20Governance.pdf

[2] The company act 2013 pg.

[3] https://blog.ipleaders.in/types-of-directors-under-the-companies-act-2013/

[4] Section 149, Companies Act 2013