Divyanshu Sharma*

Source : Directors Institute

Corporate purpose doctrine is heralded as the solution for the constant tussle between shareholders and stakeholders. Currently, the ideals of corporate responsibility and sustainability are making a headway in the Indian corporate landscape, which requires the respect and protection of stakeholders’ interests. In this situation, a question arises about the extent to which corporate purpose statements can enable directors to govern corporations in a way which balances the interests of shareholders and stakeholders, considering the controlled shareholding pattern of Indian companies. This question becomes further complicated by the dominance of family-controlled corporations in the Indian corporate landscape. These firms are usually perceived to be antithetical to the success of corporate statements. However, the author concludes that the values, ethos, and socioeconomic capital underlying these corporations makes them fit for adopting and implementing a purpose statement. This can be done through family constitutions, which are getting prominent in the Indian corporate landscape.

INTRODUCTION

The recent judgement of the Dutch Court of Appeal in the Shell case has brought to light the constant tussle between stakeholder and shareholder interests in the corporate world. As alleged by the original complainants, corporations like Shell Plc are oblivious to their impact on the environment and climate change. Being sympathetic to the concerns of shareholders, these big corporations obsess over profit maximisation, overlooking their ethical obligation to protect the general community from the doom of climate change. Rather, they unabashedly make matters worse, by having huge carbon footprints, in the name of profit and corporate survival.

This mismatch between the perceived purpose of corporations (i.e., profit maximisation) and their sustainability obligations is the foundation for the debate on corporate purpose. Corporate law scholars advocate for the utility of a corporate purpose statement in holding corporations accountable for stakeholder interests. India is not new to the debate on corporate purpose and stakeholder interests, like the U.S. and the U.K. Indian corporate law statutorily requires Indian companies to recognise and respect stakeholder interests (see here and here).

However, the pluralist approach of the Indian law towards protection of stakeholder interests makes the Indian law vain. This problem gets exacerbated by the fact of concentrated shareholding patterns in Indian companies, which makes the corporate setup a tool for realisation of personal interests of the controlling shareholders (known as promoters in India). Amongst the variety of controlling shareholder institutions, families are the most prominent ones in India. Family firms comprise almost 75 percent of Indian economy. These firms have their own agency problems, wherein corporate decision-making is influenced and controlled by the founding-family. In such a situation, questions arise about the potential of success of the corporate purpose theory in the Indian economy, specifically family-controlled firms, as adherence to a pre-defined purpose requires the relinquishment of short-term personal gains .

In this article, the author intends to assess the viability of the corporate purpose theory in reference to family-controlled firms, which constitute the bulk of the Indian corporate landscape. To that end, the author shall first briefly touch upon the fundamentals of the corporate purpose theory. Then, the author will delve in the nuances of family-controlled firms making them distinct from other non-family corporations, which necessitates a study like the one undertaken by the author. Lastly, the author will share his understanding on how elements like values, ethics, and socioemotional wealth of the company, which are unique to family-controlled firms, enhance the chances of success of the corporate purpose theory in Indian family-controlled firms.

WHAT IS PURPOSE?

According to Colin Mayer, corporate purpose should transcend the shareholder-stakeholder debate, and should be defined in relation to producing solutions to problems plaguing the society and environment. He eloquently defines purpose as generating ‘profitable solutions to the problems of people and planet, and not to profit from producing problems for people or planet’. This problem-solving conception of corporate purpose is supported by Sjåfjell and Mähönen, who propose a conception of corporate purpose based on planetary boundaries, to remedy the climate change crisis.

The aim of redefining purpose is to rebuild the connection and trust between the firm and its stakeholders, and to create a corporate culture of ‘ethics and values’ (page 14). What is needed is a prioritisation of the attainment of the stated purpose over profit-maximisation for shareholder satisfaction, as for Mayer profit should be nothing but a by-product of corporate operations (ibid, 10).

Similar to Mayer, Malcolm S. Salter conceives corporate purpose based on ethics and respect. He argues that corporations and their managers should adhere to a pre-defined all-inclusive purpose (which embodies the interests of shareholders and stakeholders) due to the ethical responsibility of companies to protect the interests of the stakeholders. According to him, corporations are contractual entities which require the support of stakeholders to ensure the formers’ survival. Stakeholders will only grant this support if corporations fulfil their interests and needs.

Thus, corporate purpose theory requires a recalibration of a corporation, which is divorced from the obsession over profit as advocated by Milton Friedman. It requires corporations, and indirectly their controlling shareholders (for concentrated shareholding jurisdictions like India), to recognise the interests of stakeholders and make way for the common good over private interests. The core of the theory lies in the adherence to a corporate purpose statement, adopted by the company (through its board and shareholders), which is believed to lead to the fulfilment of the interests of shareholders and stakeholders in the long term. The idea is to ensure that the board of directors do not get embroiled in the shareholder-stakeholder debate, and enable them to pursue the purpose statement, even if it leads to short-term costs for the company’s shareholders. This raises practical questions about the extent to which controlling shareholders would be willing to make way for the stated purpose, as it would require the relinquishment of their private interests in the firm. This question can be answered by analysing the motivations of controlling shareholders, which would vary across the different categories of controlling shareholders.

As previously stated, the focus of this piece is family-controlled firms in India. Thus, in the remaining portion, the author would look into the motivations and values underlying family firms which make them averse or accepting to a redefined corporate purpose.

THE PECULIARITY OF FAMILY-CONTROLLED FIRMS

Family-controlled firms are corporate entities where family (as an entity) and business (as another entity) are enmeshed together. Due to this, family values and ethics coupled with mutual trust amongst the family members play a central role in the operations of these firms. The founding families encapsulate the common values and vision for the firm, which are expected to guide the firm’s management and employees.

As firms is that they aspire for transgenerational business survival and growth, the continuation of these family values and vision become an identifying characteristic for the firm. Unlike non-family firms, these firms aspire to pass on the baton of leadership to the successive generations of the founding family. Due to this, the future leaders of family-controlled firms seldom deviate from the values and vision of the founders, to ensure their legitimacy in the firm. However, Sanchez-Famosa and others observed that third-generation and future leaders may sometimes deviate from the original values and vision, to establish the uniqueness of their leadership.In the Indian context, the continuity of the business values is undertaken through a constitution, which encapsulates the vision, ethics, and ethos of the family.

 In terms of stakeholder relationships, family-controlled firms are paradoxical. On one hand, these decisions and policies of these firms are strongly influenced by the desire of the founding family to preserve their socioemotional wealth (which refers to the value derived by the family from controlling the firm). On the other hand, these firms heavily invest in promoting and protecting their social capital. They rely on the social capital of the founding family to enhance its value. Due to their ethical foundations and social capital, these firms are considerate to the needs of stakeholders and strive towards greater stakeholder satisfaction. Through the perpetuation of the founding values and ethics, even the non-family employees of these firms are trained to engage in non-opportunistic stakeholder-friendly behaviour.

 For instance, – the Indian values and traditions exuded by the Ambani family play a vital role in the growth of Reliance. The family is known for carrying forward the legacy of the founder-patriarch Dhirubhai Ambani, who was also a well-respected philanthropist. In fact one of the CSR initiatives undertaken by Reliance, related to education, is based on the values of Dhirubhai Ambani. Moreover, the family legacy is being further carried forward by the next generation of the family, with Anant Ambani’s Vantara initiative, which is aimed at protecting and rehabilitating endangered animal species. All these underlying generational and religious values contribute to the success of the company.

CORPORATE PURPOSE AND FAMILY-CONTROLLED FIRMS

Author argues that, family-controlled firms in India possess some unique characteristics vis-à-vis non-family firms, which make them apt for the corporate purpose doctrine. Purpose, as discussed above, is aimed at holding corporates liable to their ethical obligations of protecting stakeholder interests. It aims to guide the management of companies away from the traditional profit-centric purpose to a socially beneficial one. As a practice, family-controlled firms strive for stakeholder satisfaction while protecting shareholders’ interests. Thus, for them to accept and implement a purpose, which encapsulates the interests of the company’s stakeholders and shareholders should not be a problem.

Moreover, the socioemotional wealth of the business is of utmost importance to the founding-family. Thus, expecting the family to accept an externally dictated purpose might be far-fetched. But if the controlling-family is given the authority to decide the purpose statement, there is no reason why the family would be averse to the adoption of a redefined purpose. However, one can argue that the exclusive right to frame the purpose to the controlling family can lead to greater abuse by the controlling shareholders. According to the author that might not be the case. Considering that family-controlled firms are already under the influence of controlling shareholders, and multiplicity of shareholders’ interests is a practical hurdle to the implementation of the corporate purpose theory, giving the controlling-family the power to define the purpose could rather streamline the process of adopting and implementing a redefined purpose. Due to a unified management structure, which operates concertedly under the commonly accepted vision and mission, there is a greater chance that the management (comprising of family and non-family members) would resonate with the redefined corporate purpose and willingly implement effectively.

Furthermore, there is no reason to argue that the controlling family would be inclined to define the purpose in a manner detrimental to the stakeholders. In fact, the controlling-family’s social capital, values, and ethos could be a good starting point for arriving at the ethically responsible purpose. However, such a perception begs the utility of a pre-defined purpose, considering that stakeholder interests are even now being respected by family firms due to their values and ethos. The author argues that this argument is shortsighted considering that presently, the values and future mission for these firms are communicated informally through family-controlled decision-making. This paves the way for deviation from these commonly accepted but uncodified values for the future generations. By having a codified purpose, founding families can ensure that successive generations and external managers (which are mandatorily required in listed companies in India) do not deviate a lot from the originally conceived stakeholder-friendly purpose.

The author argues that the constitutions used by Indian family-controlled firms to regulate future generations are a good place to incorporate the redefined purpose. Indian companies like Dabur, Emami, Dr. Reddy’s, and GMR have adopted family constitutions, to ensure the smooth generational-transition and growth of their family corporations. These constitutions are heavily influenced by the values and common mission of the family, which according to the author should guide the formulation of the corporate purpose. While these constitutions are not legally binding, research has shown that they are given bindingness through contracts of association and inheritance. This means that the purpose encoded in those constitutions can govern the policies and operations of family-firms, which when based on contracts can be legally enforced.

Family constitutions are usually broad in their scope, thereby enabling the board of the company to frame and implement policies in response to emerging issues, but within the contours of the values and ethos in the constitution. This way a family constitution would not impede the directorial freedom to make decisions, while ensuring that the directors do not go beyond the purpose statement of the company. However, a point worth noting is that a family constitution is binding only if all the family members involved in the business of the company participate in the formulation and adoption of the constitution. While the process of getting all the members to sit and agree on the terms of the constitution can be time-consuming (like 18 months in the case of Dabur), it can lead to long-term benefits like unity of thought regarding the future of the company and the direction of its growth. Thus, the purpose statement adopted in such constitutions would be acceptable to all the family members who would one day be involved with the management of the company. This would ensure that the company’s management would be disincentivised to detract from the purpose statement and pursue shareholders’ interests over that of stakeholders.

CONCLUSION

Indian corporate landscape is not free from the tussle between shareholder and stakeholder interests, like the U.S. and the U.K. Emerging concepts like corporate sustainability and responsibility embroil board discussions and corporate policy formulation even in India. One solution proposed to settle this difference is the adoption of a corporate purpose statement which would lead to unbiased corporate policies and decision-making. However, like all corporate governance doctrines, even the corporate purpose theory needs to be analysed for its chances of success in India, considering the controlled shareholding pattern prevalent in Indian companies, unlike the U.S. and the U.K. The chances of the adoption and implementation of such a purpose statement gets further complicated in India considering majority of Indian firms are family-controlled.

Contrary to the general conception of family firms being antithetical to the success of corporate purpose doctrine, the author concludes that Indian family-controlled firms are highly conducive for the adoption and implementation of a corporate purpose statement. These firms are enmeshed with the ethics, values, and socioeconomic wealth of the founding family, making them more respectful to the needs of their stakeholders. This makes these firms likely to adopt an inclusive purpose statement and implement it to the teeth. Herein, Indian family-controlled firms can make use of family constitutions. These constitutions can provide a purpose statement for the company, based on the founding family’s values and ethos, which can guide the successive generations of corporate leadership towards the compliance of the purpose statement. This would avoid possible deviations of the company’s management towards shareholder’s interests at the expense of the stakeholders, thereby leading to a more responsible and sustainable corporate landscape in India.

*The author is a legal associate at S&R Associate, Delhi. He holds a B.A.LL.B. (hons) degree from National Law University, Delhi. He takes keen interest in corporate governance, corporate sustainability, and corporate purpose.