Redefining Corporate Purpose: An International Perspective
27 Pages Posted: 1 Dec 2016
Date Written: September 30, 2016
Over the past decade, corporate law in India has begun a reform journey with important implications for not only corporate governance, but also for deeper questions about the purpose of the corporation and beneficiaries of the corporate form. Following years of debate and attempts at reforms that began in the late 1990s, the reform efforts culminated in the 2013 Companies Act. In designing India’s new corporate law, policymakers grappled with the subject of corporate purpose and determining which institutional structure is in the best place to further the purpose of the corporation. When viewed holistically, the Companies Act is a radical experiment with corporate purpose. The Companies Act does not specifically detail the concept of corporate purpose, other than stating that a company may be formed for any “lawful purpose.” Nevertheless, the Act’s various provisions regarding board fiduciary duties and responsibilities make clear that shareholder wealth maximization should no longer be the primary lens for decision-making by Indian boards. One of the most essential provisions of the Act declares that corporate directors “shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.” Moreover, the Act’s code for independent directors requires them to “safeguard the interests of all stakeholders” and to “balance the conflicting interest of the stakeholders.” These duty-focused provisions are then bolstered by several other important provisions including those relating to CSR spending and disclosure and, in some cases, stakeholder access to board members. The substantive reforms of the Companies Act are overlaid with an extensive disclosure regime that envisions a vast increase in corporate transparency.
India’s new corporate law in many ways both mirrors and moves beyond debates in other parts of the world to redefine the purpose of the corporation. Given the large extent to which corporate law in India looks at comparative examples from other common law jurisdictions, this Article primarily focuses on comparative developments in the U.K. and U.S. In the U.K., for example, the concept of “enlightened shareholder value” was introduced through statute with passage of the U.K. Companies Act 2006. Similarly, while India was undergoing its debates regarding corporate purpose, the U.S. was debating the purpose of the corporation and experimenting with different forms of business entities, such as benefit corporations, aimed at moving away from the claim that the law requires shareholder wealth maximization as the primary purpose of the corporation.
Overall, India's reforms suggest that India intends to transform corporate purpose beyond the ESV model adopted in the U.K. Moreover, unlike the U.S. move to allow for benefit corporations, India’s transformation of corporate purpose does not apply to a mere subset of entities, but instead contemplates an overhaul of corporate vision in Indian firms. Nevertheless, there is reason to doubt that the specific legal provisions provided by the Companies Act will in fact lead to substantive structural change given the various forces and institutions that may stand in the way of redefining the purpose of the Indian firm.
Keywords: Corporate Purpose, India, CSR, Benefit Corporations, corporate social responsibility
JEL Classification: K22
Suggested Citation: Suggested Citation