Author(s) :

Shweta Sharda, Shital Jhunjhunwala, J.P.Sharma.

Volume/Issue :

Abstract :

In the current competitive scenario, the sustainability of an organization is based upon the contribution made by multiple stakeholders in achieving its objectives. Among all the stakeholders, employees and government hold a significant place for their contribution as primary and secondary stakeholders respectively. Government acts as the backbone in the formation of a company, and employees influence the firm’s performance by building customer loyalty, eventually generating value for shareholders. Since the management has discretion over a wide range of decisions including those affecting the stakeholders’ interest, the role of the board becomes pivotal in justifying the actions of corporate managers in addressing them. The study is therefore undertaken to investigate the impact of the board on addressing expectations of these stakeholders, using panel data of 4065 Indian listed companies for fourteen years from 2006 to 2019. The results show a negative impact of board meetings on employees’ compensation, and that separation of CEO and Chairman positions and multiple directorships positively impact both stakeholders. Also, the results showed that the presence of independent directors negatively affects compensation but their participation benefits both. This indicates that the mere presence of independent directors on board cannot make them effective but their engagement is what matters in making the corporate governance meaningful. This implies the need to frame stringent regulations on the evaluation of contributions made by independent board members to make them accountable.

No. of Downloads :

15

KEYWORDS:

Board, Corporate Governance, Directors, Employees, Government, Performance.

INTRODUCTION & OBJECTIVES:

According to the shareholder’s perspective, the fundamental purpose for an organization’s existence is considered to maximize the interests of shareholders. This is challenged by the stakeholder approach, which believes that an organization should exist as a socially responsible entity serving the interest of multiple stakeholders who contribute to the wealth-creating capacity of the organization through their services. The companies ought to appreciate the fact that the stakeholder groups comprising employees, creditors, suppliers, customers, national government, the local community including the natural environment, are in reality the major contributors, and that the returns on shareholders’ investment can be generated only with their support. The companies must therefore consider the interests of all stakeholders while taking policy decisions and not just the shareholders. The successful demonstration of the firm’s willingness and its ability in satisfying the expectations of all the stakeholders would guarantee its viability over time. Every company has multiple stakeholders who affect its business, they are categorized into primary and secondary stakeholders depending upon their influence over the company’s smooth business operations. Amongst the broader set of primary stakeholders that a company has, employees constitute the front line of every company. The human capital invested by employees in the form of years of service plays a vital role in the profitability and growth of the organization. The efforts and skills of employees enable the company to produce higher quality products and services, delivering the services of an organization to its customers (Bettencourt and Brown 2003; Bettencourt, Brown and Mac Kenzie 2005) which influences both customer satisfaction and loyalty (Brady and Cronin 2001), and eventually the firm performance. Employees are therefore the greatest asset of the organization who act as an important driver in enhancing firm performance by meeting customer’s expectations. On the other side, government plays a highly influential role as a secondary stakeholder of the company. It acts as the backbone in the existence and establishment of a company by providing it the license to operate. It influences the commercial activities of the company by regulating the economic undertakings, providing tax concessions, and enforcing law and order through the imposition of rules and regulations. The government also acts as an intermediary between the company and society, it invests the corporate taxes for the overall welfare of society. Given that both employees and government stakeholders are means to achieve the end, the study considers the crucial role played by them as primary and secondary stakeholders respectively. Considering that both these stakeholders exercise a strong influence over the commercial activities and continued survival of the company, it becomes the moral responsibility of the company to act according to their requirements and meet their respective demands. The continuity in the economic success of the company is of utmost importance to both employees and the government, for their returns are tied to the company’s performance. They expect companies to address their interests in return for providing resources to the company. The employees expect fair compensation, and the government expects timely payment of taxes from the company. The company can have greater access to these resources only if management resorts to a stakeholder approach instead of maximizing shareholders’ returns. Since human capital is the source of competitive advantage and has a powerful link with business performance, a company must design a fair compensation policy to build a satisfied & motivated workforce. It would help in aligning employees’ individual goals with that of the company creating wealth for the company, which would then generate tax revenue for the government. To ensure that management takes into account the interest of a broader set of stakeholders, corporate governance has emerged to play a vital role without which the firm will not be able to sustain its performance. The goal of governing a company is to maximize its long-term value by monitoring corporate decision-making, which involves establishing incentives and procedures that serve the interests of shareholders while respecting the interests of other stakeholders as well in the corporation.4 The board of directors is the essence of governance; they act as a monitoring mechanism to prevent self-interested managers from taking actions that could hurt the interests of the company’s stakeholders. They are responsible for disciplining the management and oversee that management does not exploit employees by paying fewer wages, or engage in tax avoidance strategies, to maximize returns for shareholders. The adoption of good corporate governance hence becomes indispensable in encouraging the management to address stakeholders’ interests while taking decisions. Numerous studies have been undertaken to discuss the relationship between corporate governance and firm performance, but the literature has rarely explored the impact of corporate governance on stakeholders, especially employees and government. Since the board is expected to ensure that management behaves in a socially responsible manner and satisfies their workforce through a welldesigned compensation structure and monitors the tax strategy employed by management, the link between corporate governance and stakeholders does exist. The study is thus undertaken to fill the research gap by examining whether the board of directors influences management’s decisions regarding compensation paid to employees and tax paid to the government. By employing fixed effects regression on firm-level panel data of 4065 Indian listed companies over the fourteen years from 2006 to 2019, it contributes to the field of corporate governance by highlighting the stakeholders’ concerns. It offers companies the direction towards managing their stakeholders in an integrated manner, and not as separate elements. The rest of the paper is organized as follows: the next section develops the theoretical background of the research; then reviews the related literature and formulate hypotheses; followed by research design describing the construction of sample, variables, and methodology, thereafter presents the analysis of results, discussion and finally, a conclusion is drawn.

DOI:

10.58426/cgi.v3.i1.2021.8-38