Responsible Capitalism and Corporate Purpose: The India Way

The Indian corporate establishment is already well underway in the pursuit of stakeholder goals that the US business leaders have only recently pronounced.

In 2019, an announcement by the Business Roundtable, an influential body populated by the CEOs of leading US companies, reignited the smoldering debate surrounding the purpose of a corporation. In a drastic change of heart, the Business Roundtable shared its fundamental commitment to serve the corporate purpose towards all stakeholders, including customers, employees, suppliers, communities, and shareholders. It is hard to ignore the rather conspicuous placement of shareholders as the lowest down the pecking order among the various constituencies of a corporation. This development and the subsequent intensification of the discourse on corporate purpose provide an opportune moment to introspect on the state of play relating to corporate purpose in India.

If the Anglo-American approach to corporate purpose has been largely shareholder-centric – thereby motivating the likes of the Business Roundtable to articulate the broader public purpose surrounding corporations – the legal and governance systems in India strongly support the stakeholder approach, which requires companies to be managed on a sustainable and inclusive basis that accounts for the interest of non-shareholder constituencies as well. To that extent, the Indian corporate establishment is already well underway in the pursuit of stakeholder goals that the US business leaders have only recently pronounced. The Indian story is consistent with the broader trend emanating from Asia, as Professor Dan Puchniak has articulated.

No longer was the company a private contractual construct between the entity and its shareholders, but one that took on wider form given its larger societal impact.

Stakeholder-orientation is not novel in India. Several age-old business groups have long inculcated broader corporate responsibility as part of their business motto over more than a century. However, in recent decades, the push towards a stakeholder orientation in corporate governance has been driven largely by the government. In the years following India’s independence in 1947, and consistent with the socialist economic policies of the time, company law underwent amendments that incorporated the requirements for companies to act not only in the interest of their shareholders, but also in the “public interest”. In the 1980s, the Supreme Court of India enunciated that “a company is now looked upon as a socio-economic institution wielding economic power and influence on the life of the people”. No longer was the company a private contractual construct between the entity and its shareholders, but one that took on wider form given its larger societal impact.

If there was even any doubt regarding the purpose focus for Indian companies, that has been set to rest with the enactment of the revamped Companies Act in 2013. Section 166(2) of that legislation imposes duties on directors of a company to act “in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment”. As evident, shareholders are only one among several constituencies that deserve the attention of directors. This embodies the pluralist approach which places the interests of all stakeholders (whether shareholders or others) on par without creating any hierarchy among them.

 Climate risk and sustainability is not merely an option for directors on Indian companies that they may account for on a voluntary basis, but it is an obligation, which they can afford to ignore only at risk of liabilities for breach.

The judiciary too has rendered an expansive reading of the duty. For instance, the Supreme Court’s interpretation of the expression “environment” in section 166(2) is adequately capable of accommodating the risks corporations face due to climate change. Hence, a consideration of matters such as climate risk and sustainability is not merely an option for directors on Indian companies that they may account for on a voluntary basis, but it is an obligation, which they can afford to ignore only at risk of liabilities for breach. Overall, the jurisprudence surrounding corporate law in India suggests that directors ought to consider the long-term interests of the company. Conduct that involves sacrificing the long-term interests of the company in favour of short-term profitability would militate against the statute.

It is clear, therefore, that the legislative duties and responsibilities of directors clearly define the corporate purpose for Indian companies that is altogether stakeholder oriented. At the same time, it is worth noting that the corporate purpose debate in the Indian context tends to be enmeshed with the statutorily mandated corporate social responsibility (CSR) requirements under corporate law. This requires companies to spend at least two percent of its average net profits made during three immediately preceding financial years towards earmarked social purposes. However, this generates some amount of conceptual murkiness in the context of the corporate purpose debate as the CSR provisions in India veer towards corporate philanthropy through mandatory spending rather than the all-inclusive view that company managements must adopt on how their business operations impact society. In that sense, while the CSR regime supplements the corporate purpose stance in India, it ought not to drive the discourse.

The government has trained its focus largely on ensuring compliance with the CSR requirements in terms of corporate spending rather than addressing the broader questions of corporate purpose.

Despite the perceived lucidity in aspirations of the Indian corporate legal system towards stakeholder capitalism, there could be several hurdles in operationalizing the idea. First, there is a lack of clarity regarding the enforcement of directors’ duties to consider stakeholder interests. Second, the government has trained its focus largely on ensuring compliance with the CSR requirements in terms of corporate spending rather than addressing the broader questions of corporate purpose.

In all, proponents of stakeholder capitalism might find some utility in the history and legislative design of Indian corporate law. Although India has had a long history of stakeholderism adopted by industry, the recent efforts have been driven largely through a top-down approach by the government, with the expectation that legislative articulation of stakeholder capitalism will be infused into corporate practice. Such a strategy, though, continues to remain a work-in-progress.