An existential (but problematic) question in company law relates to the very purpose for which companies are incorporated and managed. Are companies to be run solely for the purpose of maximizing the profits of the shareholders? Does the law insist upon recognizing – or even protecting – the interests of non-shareholder constituencies? Do the directors of a company owe any duties to act in the interests of anyone other than shareholders?
Recognizing that common law does not cast any general duty upon directors towards non-shareholder constituencies, legislatures have sought to formulate a tolerable solution to what they perceive as a gap in existing common law. The British Parliament engaged in one such legislative intervention by adopting the ‘enlightened shareholder value’ (‘ESV’) model through section 172 of the Companies Act 2006 (the ‘2006 Act’). Briefly, this requires directors to have regard to non-shareholder interests as a means of enhancing shareholder value over the long term. Although this is a hybrid approach that adopts features of both the shareholder and stakeholder approaches, in the event of a conflict among various interests, it has a stated preference for shareholder interest, thereby creating a distinct hierarchy.
Another approach was taken by the Indian Parliament through section 166(2) of the Companies Act, 2013 (the ‘2013 Act’). This states that a director of a company shall act ‘in the best interests of the company, its employees, shareholders, the community and for the protection of the environment’. It appears at first glance to cast a duty on directors to treat non-shareholder interests as an end in itself. In other words, section 166(2) follows the pluralist approach by placing all interests (whether of shareholders or other stakeholders) on a par, without creating any hierarchy, and ensuring that they are corporate goals in their own right (without necessarily constituting a means of enhancing shareholder value). This approach stays true to the stakeholder model in corporate law.
In a recent paper titled ‘The Stakeholder Approach Towards Directors’ Duties Under Indian Company Law: A Comparative Analysis’, we examine the nature and content of the duty cast under section 166(2) of the 2013 Act in India. We consider the implications of the duty on the scheme of the law generally, and how it is likely to impact other settled principles. We also examine some of the difficult questions emanating from section 166(2). How do directors resolve conflicts among various stakeholder interests? How do non-shareholder constituencies obtain the benefit of these directors’ duties? How should Indian courts rationalize and apply the provisions of section 166(2)? In looking at these questions, we also draw on the experiences from similar debates in other jurisdictions, principally the UK.
Our principal thesis in this paper is that while section 166(2) of the 2013 Act in India, at a superficial level, extensively encompasses the interests of non-shareholder constituencies in the context of directors’ duties and textually adheres to the pluralist stakeholder approach, a detailed analysis based on an interpretation of the section and the possible difficulties that may arise in its implementation substantially restricts the rights of stakeholders in Indian companies. Moreover, while the stated preference of the Indian Parliament veers towards the pluralist approach that recognizes the interests of shareholders and non-shareholder constituencies with equal weight, the functioning of the Companies Act, as well as the principles of common law relating to directors’ duties, make the Indian situation not altogether different from the ESV model followed in the UK. As such, proponents of the stakeholder theory in India should not declare victory with the enactment of section 166(2). Arguably, the magnanimity of its verbiage and rhetoric in favour of stakeholders merely pays lip service to them and obscures any real teeth or legal ammunition available to non-shareholder constituencies to assert those rights as a matter of law.