CENTRAL

UNIVERSITY OF SOUTH BIHAR

GAYA-824236

SCHOOL OF LAW & GOVERNANCE

CORPORATE GOVERNANCE

PROJECT TOPIC
CORPORATE GOVERNANCE AND
STAKEHOLDER; AN ANALYSIS
Under the Supervision of: Dr. Pradip Kumar Das
Associate Professor,
School of Law & Governance
Central University of South Bihar.

Submitted By: -
KUNDAN KUMAR
B.A. LL.B. (Hons.)
9th Semester, Sec-A(2018-2023)
Enrollment Number - CUSB1813125053

1
 DECLARATION BY THE CANDIDATE

I hereby declare that the work reported in the B.A.LL.B (Hons.) project report entitle
“Corporate governance and stakeholder; Analysis ‘’ Submitted at Central University Of
South Bihar , Gaya a authentic record of my carried out under the supervision of Dr. Pradip
Kumar Das.
I am fully responsible for the contents of my Project report.

Name- Kundan kumar

Enrollment- CUSB1813125053
( Central University of South Bihar )

2
 TABLE OF CONTENT

 INTRODUCTION

 Why corporate governance

 Definitions of corporate governance

 Basic principles of corporate governance

 What is stakeholder

 Types of stakeholders

 Internal and external stakeholders

 The role of stakeholders’ in corporate governance

 CONCLUSION

 BIBLIOGRAPHY

3
 ACKNOWLEDGEMENT

I Kundan Kumar take extreme pleasure in expressing my profound gratitude towards my

Corporate governance law Teacher Dr. Pradip Kumar Das (associate professor, department of
law and governance) for inspiring me and giving me the guidance and constant support
throughout the course of my project work. However, it would not have been possible without
the support of my teachers, friends, colleagues, seniors and many other individual persons
(like librarians, computer lab staff and other college staff) and other e-resources. I would like
to thank all of them.
I would like to thanks to my parents, family members and God for
providing me everything and whose patient love enabled me to complete this project.
At last, I am deeply indebted to the eminent logical experts and philosophers and other
scholars of repute whose valuable work has highly useful in writing this project.

4
 RESEARCH METHODOLOGY

Aims and objective

 To understand the concept of corporate governance and stakeholder under Indian law

 To understand role of corporate governance and stakeholder in a company.

 Comparative analysis on corporate governance and stakeholder and its relation.

Hypothesis
Under Indian law , as well as other corporate model of other laws the corporate governance
and stakeholder resolve many problem like conflict of ideas and fraud. The absence of
corporate governance the many issues like transparency , fairness , leadership ,
accountability are arose . we find out the solution and detail analysis of these problems in our
project .

Research methodology
The researcher will emphasize and use the doctrinal method for this project topic. The
researcher will be collecting valuable data from library which includes the written works and
from the field. All these data will help the researcher to solve the research problem. All the
books , journal, articles published in newspaper, bodies report. The researcher will make use
of doctrinal process includes the use of literary sources

5
INTRODUCTION

Over the past century, business organizations have moved from single ownership, structure
and partnerships to more complex ownership and partnerships structures. This trend is
expressly demonstrated by the term Corporation. A corporation simply put refers to a
business organization having perpetual existence, powers and liabilities independent of its
founders and members.

Corporations have been seen to play a lot of significant roles in a nation’s economy all over
the world. This is as a result of the fact that these corporations contribute as well as invest
resources – human, financial, technology etc which serve as a boot to the nation’s economy
where they exist.
Corporations over the years have been seen to gain strong influence in Nations by virtue of
the extent of their wide spread activities and influence within nations. This thus implies that
there is the need to pay detailed attention to these activities of corporations as they could
potentially contribute positively or negatively to a given nation’s social, political,
environmental economic activities. On the other hand, governance means the establishment
of a structure to enhance consistent, unified policies, processes and decision making with the
sole aim of ensuring accountability.

It is therefore on this premise that the concept of corporate governance is founded. It becomes
expedient that these corporate entities be made accountable for their actions and activities.
Also serve to checkmate any form of excesses or tendencies that comes as a result of power
and influence of the corporations’ size and resources it possesses.

Sulaiman, (2003) opined that owners and managers in corporate organizations via choices
made regarding ownership, and capital structure of firms as well as in the design and
management of internal control processes could result in the creation or destruction of
economic value. As a result, corporate governance has succeeded in attracting a lot of public
interest due to its apparent importance for the economic health of corporations and society in
general (Woghiren and Imade,2005). In order to enhance a proper understanding of the
conceptand significance of corporate governance, its various definitions, basic principles as
well as groups of individuals who are involved in it are hereby explained.

6
Why corporate governance

It is necessary that we look into the importance of concept of corporate governance in order
to enhance proper understanding about its relevance. Some of these reasons are outlined
below:

i. Shareholders: These are the owners of the company who have entrusted the running of its
affairs to management hence the interest in ensuring this privilege is not abused but utilized
for the benefit of the organization.

ii. Investors: The practice of good corporate governance will attract investors as they will
evaluate the current level of financial integrity and uprightness the organization in order to
determine if their investments will be put to efficient use.

iii. Economies: Countries all over the world desire good corporate governance by business
organizations as this in turn leads to a boost in the economy of the nation in which the
business exists.

iv. Going concern: The practice of good corporate governance handles effectively the issue of
bankruptcy and other forms of crisis. This is as a result of checks and balances that help curb
any form of unethical behaviour.

7
Definitions of corporate governance

Corporate governance refers to formal systems developed by companies to ensure

accountability, oversight, and control (Ferrell, Fraedrich and Ferrell, 2005).

Corporate governance is the term that describes the role of a corporation’s executive staff and
board of directors in ensuring that the firm’s activities meet the goals of the firm’s
stakeholders (Bateman and Snell, 2013).

Corporate governance is the system by which business corporations are directed and
controlled. The corporate governance structure specifies the distribution of rights and
responsibilities among different participants in the corporation, such as, the board, managers,
shareholders and other stakeholders, and spells out the rules and procedures for making
decisions on corporate affairs. By doing this, it also provides the structure through which the
company's objectives are set, and the means of attaining those objectives and monitoring
performance." Organisation for Economic Co-operation and Development (OECD, April
1999).

Corporate governance is the structural system of institutional policies, implementing rules

and business controls that make the framework for managing and operating inside the
company (Ljubojevic and Ljubojevic, 2011).

Corporate governance includes the sets of mechanisms and processes that help ensure that
companies are redirected and managed to create value for their owners while concurrently
fulfilling responsibilities to other stakeholders. It is the combination of processes, structures
and relationships through which corporations are directed and controlled.

Basic principles of corporate governance

The concept of corporate governance applies to corporate businesses all over the world and
there are certain principles that have become accepted as well as required to be followed (Oso
& Semiu, 2012):

I. Rights and Equitable Treatment of Shareholders: This means the organization is bound to
respect and uphold the fundamental rights of its shareholders as well as give freedom for the
expression of their rights. Also a clear and proper interpretation should be given of their right
ensuring their participation in the affairs of the corporation.

8
II. Interest of Stakeholders: This involves the organization clearly stating their legitimate
stakeholders in their policies and incorporating them in their operations. In recognition of
their legal, moral, social etc obligations which ought to be fulfilled.

III. Role and responsibility of the board of directors: Board members should be persons with
the required knowledge having vast experience in handing challenges of management. The
size of the board should be determined by the extent of responsibilities and duties required.

IV. Integrity and ethical behaviour: This entails being a responsible business enterprise.
Guiding actions of directors and executives by established code of conduct to ensure ethical
and responsible decision making.

V. Disclosure and transparency: The board and management are expected to clearly and
truthfully inform shareholders information about the organization. Procedures and
mechanisms should be put in place to ensure that the integrity of the organization is
maintained. Some of these measures include engaging independent auditors, board members
to checkmate unethical behaviour or actions within the organization .

What is stakeholder

A stakeholder is a person or group who has an interest -- vested or otherwise -- in an

enterprise and whose support is required in order for an enterprise to be successful.
The term stakeholder has its roots in horse racing. A stake race is one in which the prize
money is derived from the entry fees that horse owners pay to enter the race. The entry fee is
called a stake, a synonym for risk. The person or entity that takes care of the entry fees until
the prize money is awarded is called the stakeholder. Traditionally, the stakeholder has no
financial interest in the outcome of the race.
Stake races are still popular today, and over the years, the terms stake and stakeholder have
been applied to many other types of speculation -- including the stock market. In their 1983
article, "Stockholders and Stakeholders: A New Perspective on Corporate Governance," R.
Edward Freeman and David L. Reed proposed that in order for a business to succeed, it
must create value for the owners (the stockholders), as well as for those people who do not
have a direct financial interest in the company's success, but without their help, the business
could not exist (the stakeholders). The job of the entrepreneur is to find out who the
stakeholders are and determine where their interests intersect with those of the stockholders.

Types of stakeholders

Stakeholders can be internal or external to the business. Internal stakeholders are those within
a company whose interest stems from direct employment, ownership or investment. Internal
stakeholders include employees, managers,  board mamber donors and investors. These
entities are also referred to as primary stakeholders, because they have a direct stake in the
company's success.

9
External stakeholders are those outside of a company who are indirectly affected by said
company's decisions and outcomes. External stakeholders include customers, suppliers,
government agencies, creditors, labor unions and community groups. These entities are also
referred to as secondary stakeholders, because their stake in the company is often more
representational than direct.

Internal and external stakeholders

There exist various groups of individuals that play important roles as well as have an impact
on corporate governance. These groups of individuals are referred to as internal and external
stakeholders to the organization. These internal groups of individuals according to level of
authority include:

1. Shareholders: These are the owners of the firm whose primary concern is that their
investment in the firm yields maximum returns.

2. Board of directors: These are representatives appointed by the shareholders to pilot the
affairs of the organization

3. Management: These are those tasked with the responsibility of running the day-to-day
affairs of the organization.

The external groups of individuals include:

1. Employees: These are individuals that make up the workforce of an organization. They are
the manpower resources that an organization engages in its effort to achieve its goals and
objectives.

2. Customers: These are the categories of persons who represent the reason for the existence
of the business. They are those whose needs the business seeks to profitably meet.

3. Creditors: They make available finance which the organization utilizes for growth and
expansion.

4. Supplier: This refers to those who make available various inputs required by the
organization to ensure its smooth running.

5. Investors: These are individuals or group of individuals having capacity to invest resources
in an organization. These resources could be financial, technical, manpower etc.

6. Government regulatory authorities: These are group of individuals with delegated authority
from government to formulate laws and codes and also to monitor and control activities of
business organizations.

10
7. Host community: This refers to the people and area where the corporation is situated i.e.
the geographical location of the organization.

OECD (2004:46) asserts that the corporate governance framework should recognize the
rights of stakeholders established by law or through mutual agreements and encourage active
co-operation between corporations and stakeholders in creating wealth, jobs, and the
sustainability of financially sound enterprises”.

Farrell et al. (2005) agrees that although a company has a responsibility to its shareholders, it
is also answerable to its stakeholders with whom it interacts. They assert that owing to
limited resources companies must determine its primary stakeholders and consequently
creating a governance system that incorporates stakeholder welfare and corporate needs and
interests. The organization can prioritize its stakeholders in order of importance with a view
to decide the strategic choices in the management of these relationships. This can be achieved
by recognizing and categorizing the stakeholders according to the level of power and
legitimacy which they exert on the organization. Kazmi (2008) attest that the value of
stakeholders to the organization can be evaluated by effect of the intensity and quality of
support or opposition the particular stakeholder has on the organization.

The role of stakeholders’ in corporate governance

The stakeholders though external to an organization cannot be ignored as insignificant due to

the various roles they play as well as their impact on the activities of the organization. In
agreement with this assertion, John and Sebet (1998) opined corporate governance as dealing
with the mechanisms by which stakeholders of a corporation exercise control over corporate
insiders and management to ensure that their interests are protected. It is therefore important
that organizations be acquainted with the rights of stakeholders as established by law. The
organization should also engage in active co-operation with its stakeholders in creation of
wealth, jobs and a financially sound enterprise.

Having established the importance of stakeholders to the corporation, it becomes necessary to

portray the role they play in ensuring corporate governance. Freeman, (2008) suggests that a
stakeholders’ approach to corporate governance helps to provide answers to the important
issue of priorities in relationships among stakeholders as well as how to manage these
relationships. In 2009, Zollinger argued that stakeholders are characterized by their
relationship with the company as well as interest, needs and concerns that arise, thus
becoming the focal point of the engagement process with the organization. The author further
posits that these roles include but are by no means limited to the following:

1. Experts: knowledgeable experts in diverse fields of endeavour are useful in offering

strategic advice to the company’s board when invited.

2. Technical advisers: This refers to individuals who possess expertise in technological and
scientific developments can offer well informed advice on scientific and ethical panels on the

11
social and environmental risks associated with such developments especially in science-
related industries

3. Representatives of special interests: the review of company performance and or reporting

practices can be carried out by its employees, local communities etc as they meet as
stakeholders panel upon invitation.

4. Co-implementers: This situation arises when an external body for instance a Non-
Governmental Organization (NGO) partner with the company to jointly provide solution to
an issue or address a shared challenge.

5. Co-monitors: This situation arises when the impacted communities having entered an
agreement with the company become jointly responsible for the monitoring of the company’s
sustainability projects.

CONCLUSION

Corporate governance is a vital issue where a corporate organization is concerned and cannot
be overlooked or played down upon. This is because good corporate governance is in the
interest of the organization’s smooth running and profitability in the long run. The
stakeholders who are external to the corporation form an important aspect knowing they exert
considerable influence to the corporation. However, the corporation should determine its
primary stakeholders (according to their level of power and influence they exert on the
organization) so as to prioritize its level of attention on those ones of strategic importance to
the organization. It is important that the organization realize that it is impossible to satisfy all
stakeholders hence it is best to create a balance between meeting organizational objectives
and that of its stakeholders.

12
BIBLIOGRAPHY

Bateman, S.T. and Snell, A.S. (2013). Management: Leading and collaborating in a competitive world, 10th ed,
McGraw-Hill Irwin, New York.

Belo-Osagie, M. (2002). Legal imperatives in corporate governance, The Nigerian Stockbroker, 3-15.

nt.search.myway.com/web?p2=%5EBSB%5Exdm011%5ETTAB02%5EIN&ptb=40C66AC0-DB80-4D12-9A11-
3881050B3C3E&n=7848e22d&ln

John, K. and Senbet, L. (1998). Corporate Governance and Board Effectiveness, Journal of Banking and Finance,
(22): 371-403.

Kazmi, A. (2008). Strategic management and business policy, 3rd ed, Tata McGraw-Hill, New Delhi

13